Hedge funds not managing risk

By Stephen Blaxhall
Thu 15 Feb 2007

Growing derivatives exposure within hedge funds will require more stringent risk management and valuation practices, according to a survey by Deloitte.

Growing derivatives exposure within hedge funds will require more stringent risk management and valuation practices, according to a survey by Deloitte.

The survey of 60 hedge fund advisers around the world found 50 per cent of participants held futures, swaps and derivatives without measuring off-balance sheet leverage.

"Although it does not mean the industry is headed for the equivalent of an HIH or Enron caused by inadequate valuation methods, it does mean there is a need for better risk management practices, particularly as the sector is becoming increasingly competitive," Deloitte wealth management leader Sarah Woodhouse said.

Woodhouse said there was the potential to mismatch when buying or selling units, causing investors to either overpay or redeem at less than they should.

With hedge fund exposure in Australia having grown to a current $60 billion from $2 billion in 2000, this had attracted the interest and attention of regulators, she said.

The Deloitte study found many funds were not using best-practice guidelines such as external administrators or independent valuations of their assets.

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