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Concentration risk Concentration risk

Concentration risk

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January 23, 2009
January 23, 2009
Public
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Concentration risk explanation
Concentration risk arises because of increased exposure to one trading strategy or a group of correlated funds. Commonly, concentration risk is understood as exposure to a linked group of assets, for example, by location, by industry etc., while the actual correlation factor is ignored. When analyzing an individual hedge fund, concentration risk implies exposure to the underlying securities, while, for a FoHF, concentration refers to the strategy allocation. The primary reason to control concentration risk is to avoid an excessive correlation between assets or strategies. Therefore, a naive approach of addressing concentration risk by defining the strategy exposure limits is most questionable unless the underlying correlations are considered.
Article is in the following categories:
Quant KB » Risk Management

Quant KB » Due Diligence» Quantitative Due Diligence



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