WEST PALM BEACH, FL (www.HedgeCo.Net) – Analysts believe the VAR models used by most banks to gauge hedge fund exposure risks are flawed. According to a new Reuter�s report, banks mostly rely on theVAR model to monitor their exposures to hedge fund trading risks. The system may not be totally reliable. VAR models are employed to calculate hedge fund investment risks through the use ofhistorical data and averages.
According to analysts, the VAR model was developed for use by traditional fund managers, and the system may achieve ninety-nine percent efficiency for traditional fund managers. However, in the case of hedge funds it can only achieve ninety percent of the anticipated results. Because of such deficiency, analysts believe banks should employ other methods to achieve such desired objectives.
A hedge fund analyst was quoted as saying �Hedge fund payoffs are not normally distributed; they have higher peaks and fatter tails … So the probability of extreme losses is much higher.” Edward Durkee, Florida-based chief executive officer at Athena Risk Advisors was also worried that “People are not taking counterparty risk as seriously as they could,� he added, �If we move into a volatile period in financial markets, but one in which there are no trends, there could be credit or counterparty difficulties which weren’t anticipated.”
Prime brokers believe they have come a long way from the collapse of LCTM. Part of the problem was also related to hedge fund risk management issues generated by foreign currency crisis, which led to the Russian default of its obligations. One Prime Broker commented, “We are working at seeing the whole risk picture at a glance, but it’s a slow process because it involves a lot of legal, technical and analytical work. All areas in the hedge fund arena have to be consulted.”
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: [email protected]
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