Risk management issues in European equity funds

The 2008 financial crisis highlighted the lack of effective risk management in the asset management industry, with 1471 hedge funds being liquidated in 2008 and 1023 in 2009. As well as this, asset managers experiencing negative asset growth of €1.4 trillion in 2008.

There was a lack of transparency and feasibility in the quantitative tools used to compute the value and risk management for the exotic credit derivatives products. Clearly, risk management was not well understood or used properly by financial companies that operated in this turbulent environment.

This paper provides a comprehensive analysis of current risk management practices of active European equity long-only funds and hedge funds.

Using a unique questionnaire survey many issues were revealed for the industry ranging from insufficient financial commitment of funds to risk management and risk managers not being independent enough. However, efforts have been made by funds to allocate more resources to risk management since the start of the recent financial crisis.

It was found that hedge funds tend to be more risk aware than long only institutions and that spending more on risk management is more likely to improve funds' performance rankings.

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