Hedge Fund Risks

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Hedge Fund Risks Myths
Wilber Colmerauer Liability Solutions December
2005
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US 1,200 Billion Each
No Sign of Consolidation
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Perception

• Turbo Charged
• High Fees
• Micro Organizations
• Lack of Transparency
• Prone to Fraud

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Reality

• Hedge Means Hedge
• Bond Substitute
• Institutional Product
• Leverage Not Endemic
• Shorting Not Endemic

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Return of Hedge Funds Bonds Equities
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Relative Volatility
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Hedge Profile

• Positive Returns
• Limited Capacity
• Flexible Mandate

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Investor Profiles

• Fund Partners
• Family Friends
• Ex-Employers
• Family Offices
• Fund of Funds

• Charities
• Governments
• Pension Funds
• Foundations
• Insurance Companies

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Retail Vehicles

• Performance
• Capital Guaranteed
• Leverage
• Distributors or Managers

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Hedge Fund Risk

• Market Impact
• Bonds
• Equities
• Commodities
• Currencies
• Derivatives
• Volume Impact Small

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Investor Risk

• Fund Fraud
• Volatility (overstated)
• Mis-selling of Packaged Products
• Overpriced Insurance

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WHAT TYPE OF HEDGE FUNDS
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Sector Appropriate For Portfolio?
Reviewing Info-Material
Initial Meeting Or Conf Call
Peer Group Analysis
New HF Manager

• HF Database
• HF Journals
• Introduction
• Recommendation
• Conference
• Cold Call from HFM

• Marketing
• Performance
• Other Info Data

• Categorization
• Statistical Analysis

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Files
Questionnaire
Desk Research Report
Internal Presentation
Due Diligence Report
Onsite Meeting

• Preparation for onsite Meeting
• Quant Analysis
• Return Assessment
• Risk Catalogue
• References
• 8 Ps

• Verification
• Operation
• People
• Trading/Execution
• Final discussion
• Open questions

• Team
• Product
• Process
• Performance
• Organization
• Portfolio
• Peer
• Potential

• Presentation of HFM by analyst
• Discussion within Investment Committee

HFM Rating By Committee

• Strong Buy
• Buy
• Watch List
• Not recommended

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DUE DILIGENCE IN FUND OF HEDGE FUNDS MAIN
CRITERIA