Sunday, October 01, 2006

Hull on Hedge Fund Risk

A recent Economist article hints at what John Hull spells out pretty clearly in his lessons for "users of derivatives":

1) Define Risk Limits
2) Take the Risk Limits Seriously
3) Do Not Underestimate the Benefits of Diversification
4) Monitor Traders Carefully
5) Do Not Blindly Trust Models
6) Do Not Ignore Liquidity Risk
7) This one is my favorite, having had a previous life experience on a system designed to improve the valuation of a certain balance sheet asset so that it could be used for greater leverage.....Be Cautious about Making the Treasury Department a Profit Center