Hedge fund operational failures found to be “material, but not pervasive”
Aug 19th, 2009 | Filed under: Hedge Fund Operations and Risk Management, Today's Post
As hedge fund strategies become increasingly complex, it gets more and more difficult to adequately asses the value of securities and trading strategies used. So you’d be excused for thinking that esoteric and complex hedge fund strategies provide fertile ground for operational failure.
But your assumption would likely be wrong. A study released earlier today, hedge fund due diligence provider Castle Hall Alternatives finds that the strategy most prone to “operational failure” was long/short equity, not some screwy black-box strategy cooked up by mathematicians. The runner-up: managed futures – another straightforward strategy not particularly renowned for its opacity or complexity.
The chart below from Castle Hall’s report shows the significant ($10m+) operational failures by strategy:
How could such supposedly transparent strategies be the source of so many problems? Firstly, long/short equity is a huge category. So it’s bound to be the source of a large amount of anything. But as Castle Hall points out, most operational failures are the result of misrepresentation or misappropriation of assets – both activities that require the kind of human intervention that doesn’t exist in black box strategies (Madoff jumps to mind as proof of this assertion). In Castle Hall’s words: More…
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