Risk and Quality Management - Assignment Example

Download file to see previous pages – Analysis of Risk Management Strategy (2011) 5 Conclusion 6 Sources Cited 7 Appendix 9 Introduction Hedge funds employ a number of different risk management strategies for large scale capital management for private individuals, trusts, pension funds, and other corporate investors seeking return that beats the market averages in order to grow wealth. Some of the risk management strategies used by the Paulson & Co hedge fund include: long-short strategies, portfolio diversification, merger arbitrage, quant computer trading, momentum trading, or distressed asset accumulation. (Barufaldi, 2011) The first imperative of any hedge fund is that it does not lose money on any investment, or in the fund as a whole. The most successful hedge fund managers have such a large amount of capital under management that their investments may move the stock markets and inform other traders. Because of this, large scale capital management, as practiced by Paulson & Co. and other hedge funds, must proceed under unique constraints or restrictions to risk management in seeking to outperform not only the market indices in returns, but also in outperforming other hedge funds, mutual funds, private equity groups, and venture capitalists. This essay will analyze the use of risk management strategies in financial investments made by the by Paulson & Co hedge fund in order to determine the appropriateness of their application in wealth management. Paulson & Co - Risk Management in Hedge Funds John Paulson is a New York native and Harvard graduate who founded his own hedge fund, Paulson & Co., in 1994 on Wall Street. In 2005, Paulson developed a long-short risk management strategy for the fund that placed a large amount of capital in investments that were short the subprime mortgage market through a variety of means including shorting bonds, banking stocks, and real estate, as well as collecting “credit default swap” insurance obligations that were related to derivative exposure. (Zschoche, 2008) According to experts, Paulson & Co’s risk management strategies paid off by returning 590 % in one fund and 350 % in another for a total of over $3.7 Billion USD. (Zschoche, 2008) The details of this investment strategy are retold in a book by Gregory Zuckerman, published in 2009, “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History”. (Zuckerman, 2009) Paulson and Co. reported over $29 billion USD in total assets under management in 2010, making it one of the largest hedge funds in the world. (SharpeInvesting, 2010) Nevertheless, media reports suggest that the firm is down 20% in 2011, making a further review of the hedge fund’s recent risk management strategy since the 3rd quarter of 2010 in need of analysis. Paulson & Co. – Recent History Following Paulson’s success in ‘the world’s greatest trade’ in 2007-9, the hedge fund implemented an investment long term risk management strategy that heavily favored gold. Paulson & Co’s risk management strategy then involved placing more than $3.8 billion in gold bullion through ownership of the SPDR Gold Trust ETF (NYSE:GLD) . (Johnston, 2010) This investment included a total percentage of 16% of the total SPDR Gold Trust ETF in 2010. (Katz, 2010) The hedge fund’s broad strategy following the market crash of 2007-9 was to hedge the currency inflation inherent in Quantitative ...Download file to see next pagesRead More