Risk Governance and Risk Appetite
Value-at-Risk: A Dissenting Opinion
Holistic Risk Budgeting
Theory of Risk Budgeting
Risk Budgeting for Active Investment Managers
Pension Funds and Incentive Compensation: A Based on the Ontario Teachers’ Experience
Risk Budgeting for Banks
Risk Budgeting in the Evolution of Insurance Company Risk Management
Hedge-Fund Risk Budgeting
Private Equity Risk Budgeting
From the early years of the 21st century in the US, the average endowment has increased its exposure to alternative assets (including hedge funds) from 8% to 44% and the largest ones have increased it from 20% to 60%.11NACUBO-Commonfund Study of Endowments. During the same period the average state pension fund has increased its exposure to alternative investments from 9% to 23%.22Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocation. Hedge funds have become a material percentage of the overall risk of institutional investors.
This chapter will present the unique challenges in hedge-fund risk budgeting. It will explain structural (beta) and idiosyncratic (alpha) risk behaviour. The chapter will address the persistence of both risk and return in hedge funds. It will address both “CIO”33CIO here stands for complex, illiquid and opaque securities and the initialism is a play on “chief investment officer”. See “CIO risk” later in the chapter. and dynamic risk. It will also address diversification, the key to achieving risk-efficient portfolio constructions.
ALPHA AND BETA RISK
Hedge funds are absolute-return strategies44Investment strategies that seek