Alternative Investing

Challenges and Innovation in Hedge Fund Management

Topics - Alternative Investing Hedge Funds

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Challenges and Innovation in Hedge Fund Management

CFA Institute Books

The increasing institutionalization of hedge funds brings with it many challenges. These challenges are fostering change and innovation regarding hedge fund management. Clifford Asness faces these challenges head on and provides an assessment of key issues that will arise as a consequence of institutionalization. He finds several notable changes that are under way in the areas of benchmarking, transparency, fees, and risk management.

It is well known that institutional investors require performance benchmarking for managers. Asness covers several ways to accomplish this task, and in the end, he suggests using a series of multiple benchmarks to better match differing portfolio objectives.

A hotly debated issue that has been an ongoing source of concern relates to the degree of manager transparency. To alleviate concerns, he advocates a form of transparency that has great potential for meeting varied (and often competing) investor and manager needs. His approach involves creating a detailed description of the investment process and strategies in an open and transparent way.

Another contentious issue is that of hedge fund fees. In discussing this issue, Asness emphasizes the importance of separating fees by distinguishing between returns from the more valuable unsystematic alpha relative to the less valuable systematic beta.

Methods for risk control are a final source of change. We believe the establishment of an ongoing risk control system to identify and understand sources of risk is quite simply essential to a successful hedge fund operation.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


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