Risk management of hedge funds has challenges not generally faced in traditional investment management companies. Which of the following statements are
correct about hedge fund risk management?
I. Because hedge funds can hold long and short positions and can use derivatives and leverage their exposure to market risks can experience large and
rapid changes that make it difficult to assess these exposures using only monthly returns.
II. Many hedge funds use over-the-counter derivatives which are valued by models or quoted prices and often hold illiquid assets; as a result the returns
of these strategies generally exhibit much lower serial correlation than mutual fund returns.
III. For hedge fund strategies that use leverage to amplify returns and rely on their ability to move out of trades quickly when they turn against them
liquidity risk must be closely monitored and managed.
IV. Hedge fund returns are often similar to the return of a basket of exotic derivatives with nonlinear payoffs and therefore assessing risk based on past
performance can be misleading.