Managing Risk in Alternative Investment Strategies

The first practical and accessible guide to managing risk when pursuing alternative investment strategies (AIS). Explains the value and technical complexities of hedge funds, managed futures, and other alternative investments Introduces a powerful three-pillared approach to risk management in AIS investment portfolios Reviews new trends in alternative investments, and introduces new techniques for integrating AIS into the broader asset allocation process Alternative Investment Strategies such as hedge funds and managed futures offer powerful opportunities to companies who understand the advantages of active risk management, for two reasons: their attractive risk-reward characteristics and their low correlation with traditional investments. This is the first book to focus on these investments from the point of view of the risk manager and the multi-manager/multi-strategy fund. Lars Jaeger offers detailed insights into each AIS sector, their individual features and risk profiles, today's leading tools for analyzing risk, and today's best approaches to controlling AIS risks. Along the way, he illuminates the technical complexities of alternative investments, including spread strategies, leverage, short selling, and investments in diverse asset classes and instruments. The book also provides extensive references for those who wish to explore individual topics or AIS-related mathematical models in greater detail.

• Chapter 1. Introduction
• The evolution of hedge funds and managed futures
• The traditional "black box" approach to hedge funds
• Examples of investment disasters (eg LTCM)
• Alternative investment strategies in the global portfolio
• Increasing investor demand for transparency and liquidity
• Fund of funds
• The need for sophisticated risk management for AIS
• Chapter 2. The Universe of Alternative Investment Strategies
• The universe ("map") of alternative investments
• Hedge funds
• Managed futures
• Description of the individual strategy sectors (risk-return profiles)
• The benefits of alternative investment strategies
• The risks of alternative investment strategies
• The risk premium in AIS
• The Fund of Funds approach: asset allocation in a multi-manager fund
• Chapter 3. The Principles of Modern Risk Management in Financial Markets
• Short history of risk management for financial markets
• Market risk, credit risk, operational risk, and liquidity
• How to measure risk
• Analytical tools in risk management
• Best practices in today's risk management
• Chapter 4. Risk from the Investor's Point of View
• Process risk: selection of the right investment strategy
• Transparency and liquidity
• Data risk and performance measurement risk
• The risks for the investor: underperformance, loss of capital, fraud
• Qualitative and quantitative risk of AIS
• Chapter 5. The Risk Profiles of Different Strategy Sectors
• Classification of strategy sectors in terms of inherent risk types
• Quantification of risk for each strategy, "risk benchmarks"
• Leverage
• Transparency and liquidity
• Correlations and diversification within fund of funds
• Chapter 6. Active Risk Management in a Multi-Manager Portfolio
• The role of the fund of funds manager
• The role of transparency and disclosure
• Risk measurement versus risk management
• Integrating risk management into asset allocation: the three dimensions of risk management in AIS portfolios
• The sector allocation process: diversification as the key principle
• Manager selection: the due diligence process, understanding the strategy
• "Post investment risk management": monitoring, risk measuring and management
• Current practices and developments in risk management of fund of funds
• The role of technology in risk management
• Chapter 7. Risk Measurement/Management Systems in Practice
• Tools available in the market (RiskMetrics, Algorithmics, etc)
• Chapter 8. Conclusion and Outlook