PT - JOURNAL ARTICLE AU - Sandeep A. Patel AU - Bhaskar Krishnan AU - Jacqueline Meziani TI - Addressing Risks in Hedge Fund Investments DP - 2002 Sep 21 TA - Special Issues PG - 89--97 VI - 2002 IP - 1 4099 - https://pm-research.com/content/2002/1/89.short 4100 - https://pm-research.com/content/2002/1/89.full AB - Like any asset class, hedge fund investment risks can be divided into systematic and unsystematic risks. Systematic risks refer to non-diversifiable risk factors and are compensated by an expected risk premium. Unsystematic risks, or those particular to specific investments, are idiosyncratic and can be minimized through diversification. In this paper, we discuss key systematic and unsystematic risks in hedge fund investments and present the manner in which the S&P Hedge Fund Index (S&P HFI) construction methodology addresses them. The S&P HFI controls exposures to the systematic risks through a disciplined index construction process that incorporates a stratified sampling technique to diversify the sector risk to construct a representative portfolio of hedge funds. We describe the broad sectors and strategies of hedge funds and illustrate the difference between random and stratified sampling. To understand and manage unsystematic risks, the S&P HFI Committee stipulates that an independent, rigorous, and standardized due diligence is conducted on all index candidates before inclusion.