• Presents clear insight on why hedge fund transparency is an issue, as well as offers solutions

• Includes 'perspectives' based on interviews with numerous eminent practitioners from both sides of the investor/hedge fund debate

• Service providers including consultants, prime brokers, third party marketers, capital introducers, systems providers, lawyers and accountants, will additionally acquire an enhanced insight into the needs of both investors and hedge funds in order to tailor their services to the market needs

• The press and the regulators can also achieve enhanced understanding of this complex and controversial subject

• Written by the best-selling author and practitioner Leslie Rahl, who is the chair of the Investor Risk Committee of the IAFE Committee on Hedge Fund Transparency and is uniquely placed to advise on and explain the issues for all concerned participants

SECTION I: INTRODUCTION

• What is Risk?

• Types of Risk

• Risk Transparency/Translucency

• Risk Measurement

• Risk Reporting

• Hedge Fund Risk Systems

SECTION II: WHO INVESTS IN HEDGE FUNDS?

• Institutional Investors

• Plan Sponsors

• Endowments and Foundations

SECTION III: FUND OF FUNDS

• What is Fund of Funds?

SECTION IV: HEDGE FUNDS

• An Overview of Hedge Funds

SECTION V: DIGGING INTO VARIOUS HEDGE FUND STRATEGIES

• Convertible Arbitrage

• Emerging markets

• Long / Short Equity

• Event-Driven

• Fixed Income

• Global Macro

• Managed Futures

• Market Neutral

• Short Biased

SECTION VI: APPENDICIES

• Hedge Fund Disclosures for Institutional Investors

• Sound Practices for Hedge Fund Managers

• Due Diligence

• Questionnaire for Due Diligence Review of Hedge Fund Managers

• Risk Standards for Institutional Investment Managers and Institutional Investors - Risk Standards Working Group

• Buy-Side Risk System Comparison Matrix

• Glossary

• Bibliography

Index

Reviewed by Greg Gregoriou, University of Quebec at Montreal and Hedge Fund Analytics of Montreal

A clear winner

The recent turbulence in global stock markets means this book couldn't have come at a better time. Each article does an excellent job of explaining why hedge fund transparency has become such an important issue for investors who are seeking better ways to measure and minimise hedge fund risk. This book aims to address all the questions about transparency and the types of risk related to hedge fund investing.

Leslie Rahl presents in great detail the key components of a risk management framework. The first section compares the different components of risk management and risk measurement. Market, operational and credit risk are examined, with a particular focus on liquidity risk, including a few examples and an introduction to the due diligence process.

Next, the author discusses how an institutional investor should approach hedge fund investing today, and handle the issue of risk transparency. Investors must request full position details from hedge funds, perform ongoing risk monitoring and due diligence, and carefully examine strategy drift. This is especially true for funds of funds (FOFs), where managers are actively managing the underlying hedge funds.

How a FOF manager conducts asset allocation to various strategies under different economic conditions should be of grave concern to investors. Results of recent surveys on hedge fund transparency are displayed in tables and graphs, showing investor and manager views of desired types of transparency. An important innovation for this book is that it shows the types of positions hedge funds disclose to investors.

The evolution of risk measurement over the past three decades is juxtaposed with discussion on value-at-risk, stress testing, risk budgeting and risk-adjusted performance measurement. Using a 'single number', or even a single method, to measure risk may be detrimental to the investor, so the articles discuss the pros and cons of three methods for calculating VAR and highlights some pitfalls of VAR. A handful of stress tests can also be an indispensable tool in a risk arsenal. Multiple scenarios during past extreme market events are analysed.

Next, the importance of risk budgeting and risk-adjusted returns management is discussed. A well-known firm presents a list of topics that a risk profile should address. Stress testing VAR types by region, strategy, volatility, spread and directional stress of hedge funds is also observed. As noted, a majority of risk indicators are 'backward-looking' measures, and several risk reports do not offer concrete conclusions. Risk reporting is discussed and the differences between data and information are outlined.

The second section identifies groups with an interest in hedge fund investment, accompanied by breakdowns by region and strategy. Investors can examine the most current research by top hedge fund consulting firms about what areas are being invested in. Several detailed graphs and charts identify past, present and future trends by examining various risk management standards and transparency issues. A chapter on plan sponsors has interviews with well-known pension fund managers and a partial list of pension funds investing in hedge funds. Next is a detailed display of endowment and foundation assets, as well as their percentage allocation and a list of the top 25 endowment funds investing in hedge funds.

Diversification

The third section explains the advantages of diversifying a traditional stock and bond portfolio with funds of hedge funds. The entire section is devoted to FOFs, with illustrative examples from a dozen FOF managers. Because of their unique nature, FOFs have a twofold role to play in terms of transparency and risk management. FOF managers must conduct proper tests and due diligence for manager selection, risk management, portfolio construction and diversification, and be sure to relay the results to potential investors. This section takes readers through the selection process for hedge funds of several reputable FOF managers - an invaluable resource for investors.

The pros and cons of investing in FOFs versus individual hedge funds is also covered. The rankings and volatility of FOFs with more than $1 billion in assets is displayed, as well as rankings using the Sharpe ratio and correlations versus the S&P 500 index. Finally, the question of how many funds should be used to construct an optimal FOF is discussed, as well as the performance of FOFs in down markets. Survivorship and selection bias are observed and compared with various FOF indexes, and a recent survey of FOFs is presented.

The fourth section looks at the growth of the hedge fund industry, the number of funds, assets under management, the most popular styles, risk and exposure characteristics of strategies, leverage used, volatility comparison between styles, performance of various classifications, correlation against various markets, analysis of VAR by style and extreme market events. The various FOF indexes are then compared, and there is a brief look at the 25 largest hedge funds. Interviews are also conducted with leading hedge fund managers, and there is an outlook of the future of the industry.

The last section discusses each hedge fund strategy in great depth and examines the risk factors and largest players in each strategy by examining performance, leverage and risk-adjusted measures coupled with due diligence questions for each strategy. A new twist in this book is the publicly disclosed problems for funds in each strategy. A total of eight appendices provide a wealth of supplementary information, such as questionnaires for due diligence, review guidelines, and risk standards for hedge fund managers and investors.

This exceptional book is a must for pension fund managers, endowments, institutional investors, brokers, financial planners, lawyers and anyone wishing to learn more about this fascinating industry.

Reviewed by Michael Busack, Absolut|report (www.absolut-report.de)

Hedge Fund Risk Transparency by Leslie Rahl is the most extensive work currently available devoted exclusively to the risk transparency of hedge funds. According to the author, the book aims to identify and explore all areas of risk relevant to hedge funds and, above all, explain how and when these risks should be measured, managed and disclosed.

The book is divided into six sections comprising of some 700 pages. The first section consists of six chapters that introduce the subject of risk transparency. The different categories of hedge fund risk, position transparency vs. risk transparency, risk measurement methods (VaR, stress testing and risk budgeting), risk reporting systems and their restrictions when applied to the analysis of hedge fund risks are explained.

The second section examines hedge fund risks from the perspective of institutional investors and their need for disclosure of such risks. In addition, this section includes many short interviews with managers of US pension funds and foundations on the issue of transparency.

The third section is devoted to hedge funds of funds and the risks of fund of funds investment. It also incorporates the views of many fund of funds managers on the problem of transparency, in the form of interviews.

Section IV compares the different hedge fund strategies by reference to extensive tables and graphs on the basis of several factors such as performance, leverage, risk etc. Again, some hedge fund managers' views on disclosure and transparency are presented.

The fifth section comprises nine chapters presenting the key hedge fund strategies and their associated risk factors. Along with a presentation of strategy comparisons between the different data providers, each chapter focuses on analysis of the individual indices, performance analyses, AUM, the use of leverage, key risks, applicability of VaR to the respective strategies, due diligence issues and disclosure problems that can take influence on the success of each respective strategy.

The concluding Section VI additionally presents six different studies on risk transparency and due diligence analyses in the form of shortened summaries.

Overall, with more than one thousand tables and figures as well as interviews with 27 industry experts, the book presents the reader with a very good and detailed study of the risk and transparency problems in the hedge fund industry. It should be noted, in particular, that the topic is subjected to close scrutiny from the standpoints of both institutional investors and hedge fund managers. The book is recommended to readers who want to acquire a deeper understanding of the hedge fund world.

Leslie Rahl is president of Capital Market Risk Advisors, Inc, a risk management consultancy firm. Prior to founding her consultancy firm in 1991, Leslie spent 19 years at Citibank, nine of which were as head of Citibank's Derivatives Group in North America.
Ms Rahl was named among the ″Top 50 Women in Finance″ by Euromoney in 1997 and was profiled in both the fifth and 10th anniversary issues of Risk magazine. She has been published numerous times.
She was a director of the International Swaps and Derivatives Association (ISDA) for 5 years and is currently a member of the Board of the International Association of Financial Engineers and the Fischer Black Memorial Foundation and a member of the Board of Advisors for the financial engineering programme at the Sloan School. Ms Rahl received her undergraduate degree in computer science from the Massachusetts Institute of Technology and her MBA from the Sloan School of Management.