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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