BOSLEGO RISK SERVICES

 

Robert Boslego

Harvard College, BA Economics (Honors)

Stanford Graduate School of Business, MBA

 

 

Evaluation of external hedging Strategies

 

For financial firms, such as wealth managers, funds of funds, foundations, endowments, and the like, the selection of external hedge funds or advisors for their clients’ portfolios requires rigorous due diligence.

 

Whereas the past performance of a hedge fund or advisor is always an important criterion, the risk management, or hedging strategy, of the advisor is often not examined as deeply as it should be, or even at all. Often, hedge funds do not have reliable risk management strategies in place.

 

The proof of this latter statement is the surprisingly high correlation of hedge fund indexes to beta markets. Successful hedge strategies of course limit the downside risk and therefore result in lower correlation.

 

Looking at historical correlation is not enough though. A hedge fund’s past performance is based on who was managing the fund, the strategies employed, and their risk preferences. Managers, strategies and risk preferences change over time.

 

 “Past performance may not be indicative

of future performance”

 

the result of overlooking the evaluation of the hedge fund’s current hedging strategy may be unexpected, substantial  losses for the client’s portfolio. Such losses also tarnish the reputation of the financial firm allocating to the hedge fund.

 

Financial firms who allocate capital to external hedge funds often do not employ experts who have developed sophisticated hedging strategies and have a deep knowledge to evaluate and monitor the hedging strategies. It’s important to know how the hedge fund’s hedge strategy will perform under different market conditions and be able to assess if the hedge strategy is performing as it should.

 

As an expert in developing hedging strategies, Boslego is uniquely qualified to assist financial firms perform their due diligence when allocating to an external hedge fund.