Managing hedge funds' operational risks
It is widely accepted that due to their trading activities and unregulated status, hedge funds exhibit potentially large exposures to non-financial risks.This, the first of three articles, attempts to assess how far hedge funds are exposed to operational risks, develops the framework of what can be considered appropriate operational due diligence and investigates how operational risks can potentially be quantified
By their very nature, hedge funds allow investors to be exposed to different risk factors including volatility, counterparty, or liquidity risk, since this exposure is considered a source of superior returns for invested funds.
Market makers receive a premium (the spread) when acting as liquidity providers in a market. When hedge funds implement trading strategies that provide liquidity to a market, part of the return that can be expected is a premium for the liquidity risk they carry when
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