Risk Budgets Not Hot at Hedge Funds

April 25, 2002 (PLANSPONSOR.com) - Only 14% of hedge funds and 19% of funds of funds have had risk budgets assigned by investors, new research from the an industry group representing alternative investment managers finds.

Additionally, according to a survey by the Alternative Investment Management Association (AIMA)

  • 27% of investors say they have assigned risk budgets to their funds
  • 7% are studying the idea.

Yet only 43% of funds of funds that rely on managers to track their risk exposure feel they that they understand the details of the risk calculations performed by each of their managers, and calibrate and aggregate risk across managers, according to the AIMA research.

Risky Business

The survey also found that:

  • 61% of both individual hedge funds and funds of funds include risk limits in their investment guidelines
  • 79% of both individual hedge funds and funds of funds have written risk management policies and procedures, but only 56% of investors do
  • 59% of funds of funds, 54% of hedge funds, but only 4% of investors have their risk management practices and procedures independently reviewed.
  • 57% of funds of funds claim to compute Value at Risk (VAR) for their overall fund of funds.

In addition

  • 89% of funds of funds indicate that they provide formal Net Asset Valuation monthly
  • 7% provide it quarterly
  • 4% do it bi-weekly.


According to the research, leverage is defined in a variety of ways by funds of funds and by individual hedge funds.

  • 69% of fund of funds use gross balance sheet assets to equity, compared to 28% of hedge funds
  • 27% of fund of funds use gross balance sheet assets to equity adjusted for off balance sheet transactions, versus 19% of hedge funds
  • only 4% of the former use Value at Risk, versus 19% of the latter.

The survey on risk management forms part of AIMA’s review of fund of funds investing.