Community Q&A
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What should a contingency funding plan include and how are escalation triggers designed?
A Contingency Funding Plan is a predefined action plan activated during liquidity stress. It includes governance structures, early warning indicators, staged escalation frameworks, and quantified action menus for each stage of deterioration.
What are the unique challenges in measuring hedge fund risk and how do standard risk metrics fail?
Hedge fund risk measurement is challenging because hedge fund return distributions violate many assumptions underlying standard risk metrics. Non-normal distributions, stale pricing, leverage distortion, and option-like payoffs all cause standard measures to understate true risk.
How do you measure risk in private equity funds, and why are standard portfolio metrics inadequate?
Private equity risk measurement is challenging due to illiquidity, smoothed valuations, and the J-curve pattern. Standard metrics like volatility, Sharpe ratio, and correlation are systematically biased when applied to PE, overstating its risk-adjusted appeal.
What are the key risks in structured credit products like CDOs and how does tranching affect the risk profile?
Structured credit products like CDOs pool exposures and redistribute risk through a waterfall structure. Tranching doesn't reduce total risk — it concentrates and redistributes it, making correlation assumptions critical to valuation.
How does risk budgeting work in portfolio construction and what are its practical applications?
Risk budgeting allocates a total risk budget across portfolio components, ensuring each position contributes the intended amount of risk. Unlike traditional return-based approaches, risk budgeting starts with risk and distributes risk-taking capacity intentionally.
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