Hedge funds experienced a new challenge during the recent financial crisis: the simultaneous collapse of major financial institutions that were their trading counterparties and service
providers, fundamental and systemic increases in market volatility and illiquidity which led to mark to market losses and increased demands for margin from their creditors, and lastly
unrelenting demands from investors to redeem their hedge fund investments. Many hedge funds were unprepared for the maelstrom that engulfed them and many have failed or been forced to
close due to resulting poor performance. This book encapsulates the lessons learned from the recent crisis and advises hedge fund managers and CFOs how to manage the risk of their investment
strategies and structure relationships to best insulate their firms and investors from failure of financial counterparties so that their funds can remain free to take full advantage of
opportunities presented by financial crises.
Risk management and maintaining funding liquidity are critical to differentiating a fund’s performance in a crisis. Avoidance of losses in the fund’s investment portfolio via effective risk
management is only part of the solution. Having the ability to maintain or increase leverage and liquidity due to having negotiated binding lock ups and committed facilities with your prime
brokers, and matching portfolio liquidity with potential investors redemption demands are also critical to maintaining a funds ability to opportunistically profit from a crisis.
