Post-LTCM, most funds ignore VAR

By John Wagley

How quickly they forget.  Ever since the near-collapse of hedge fund Long-Term Capital Management brought the threat of government regulation to this freewheeling industry, hedge funds have been promising better self regulation, including sophisticated risk management.  But probably less than a third have actually implemented value-risk (VAR) techniques, the market-based methodology used to estimate potential future losses.

That’s according to Capital market Risk Advisors, Inc., which recently surveyed U.S. hedge funds, most of them with less than $500 million assets, on their risk management techniques.  While 75% of those who responded to the survey said they have a risk manager, only 57% are currently calculating their portfolio’s VAR, according to the study’s authors concede that respondents are likely to be heavily weighted with those funds that do have some risk management techniques.

Leslie Rahl, CMRA’s  President, said many hedge funds managers do not feel the need to perform regular stress test and go through sometimes complicated VAR procedures.  “A lot of them feel they can be successful using their institution and past experience.”

June 5, 2000