A growing gap

More and more dealers are entering the hedge fund derivatives market, and ever more complex structures are being launched. But while the fund-linked derivatives market has grown strongly, there is little consensus on the best way to manage the risks arising from these products. By Jayne Jung

Hedge fund derivatives are garnering strong interest from banks and investors. In the most recent incarnation, dealers have created options linked to the net asset value (NAV) of a hedge fund as part of employee compensation schemes. Rather than traditional employee stock option programmes, which allow employees to buy shares of their company at a pre-agreed price once their options vest, hedge fund employees are instead given a warrant on shares of the fund's assets. The benefit for hedge funds