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Operational risk red flags: Lessons learned from ten hedge fund blow-ups

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  • Cagan, Penny

Abstract

This paper examines the lessons learned and ten specific 'red flags' that can be extracted from a case study analysis of recent hedge fund blow-ups, with emphasis on the Amaranth Advisors loss event. An in-depth discussion is included on the recent US Senate report on Amaranth and the role that electronic unregulated markets played in that breathtaking event. Through a systematic analysis of Amaranth and other events, a list of criteria is established for evaluating the risk profile of an individual fund from the perspective of investors or other exposed entities, such as service providers. These recommendations include an analysis of the mix of trading activity on regulated versus unregulated exchanges, the role that models play in day-to-day management, risks inherent in promoting a star culture and attention to market practices.

Suggested Citation

  • Cagan, Penny, 2008. "Operational risk red flags: Lessons learned from ten hedge fund blow-ups," Journal of Securities Operations & Custody, Henry Stewart Publications, vol. 1(2), pages 131-152, February.
    • Handle: RePEc:aza:jsoc00:y:2008:v:1:i:2:p:131-152
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    More about this item

    Keywords

    hedge funds; operational risk; lessons learned; unauthorised trading; rogue traders; risk management; expert opinion; quantitative models; valuation; blow-ups; case studies;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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