Bringing Investor Confidence Back to Alternative Investments: How Enterprise Risk Management is the Answer

Abstract

The concept of enterprise risk management will be examined in the context of multi-strategy hedge funds and fund of hedge funds. This paper seeks to demonstrate that risk at these organizations has to be considered holistically and not in “silos”. A number of qualitative and quantitative tools will be suggested and their use will be demonstrated on such hedge funds as Amaranth. The result of implementing these tools will show that the risks in these funds were increasing months prior to their blow-ups. This finding will be used to demonstrate the need for qualitative filters at fund of fund investment committees to suggest redemption even though returns have not suffered. Having outlined the ERM concept for hedge funds and some tools that could be used to implement it, it will be shown how implementing ERM can lead to a less risky portfolio that should lead to greater investor confidence and a more stable business model.