Funds of hedge funds face double whammy of volatile markets and risk management challenges

Disappointing returns have raised questions about the ability of fund of hedge funds (FoHFs) to manage risk effectively in a volatile market environment. Risk management is now top of the agenda.

Few would dispute that funds of hedge funds (FoHFs) have by and large failed to live up to their billing in recent years.

The Madoff fraud exposed the weak operational due diligence procedures of many FoHFs and left the industry as a whole with a black eye. FoHFs have responded by tightening operational due diligence and insisting that hedge fund managers appoint third parties to verify and price their holdings.

The more complex challenge is addressing the risk management failings that left many