A study conducted by Jean-René Giraud of the EDHEC Risk and Asset Management Research Centre, titled "Mitigating Hedge Funds' Operational Risks: Benefits and Limitations of Managed Account Platforms," shows that, when accompanied by appropriate risk monitoring and adequate structuring of the relationship with the hedge fund manager, managed accounts today represent a very efficient approach to mitigating operational risks, especially when the size of the investments does not allow for a dedicated operational due diligence and risk monitoring team to be set up.
Operational risks mitigated through the use of managed accounts include
- Misappropriation
- Misrepresentation and incorrect pricing
- Trading outside of the operating mandate
These represent 85 percent of the hedge fund collapses analyzed.
The study identifies governance, specifically the absence of independent oversight, as the most important element to be considered before investing in hedge funds.
The outcome of the study convinced the EDHEC Risk and Asset Management Research Centre that the benefits of managed account platforms clearly outweigh their cost and limitations, provided the infrastructure allows for the implementation of a systematic approach to measuring and managing financial risks, and that the design of the platform allows for most operational risk factors to be substantially mitigated.
Founded in 1906, EDHEC Business School has campuses in Lille and Nice, France. The school focuses on asset management and alternative investment research, with several of its professors serving as international experts in the fields of asset management, fixed-income securities, alternative investments, and risk management. The EDHEC Risk and Asset Management Research Centre maintains a Web site devoted to asset management research for the business community: www.edhec-risk.com.
The detailed results of this study were presented at the EDHEC Hedge Fund Days in London, England, on February 15. To receive a copy, contact Carolyn Essid at carolyn.essid@edhec-risk.com.
