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To manage risk, we need to know what are they, risk arises from a few sources, market moves against you,

you have positive paper PNL with an counter-party and he may default. You have a few large positions in

illiquid securities and have to sell them in a hurry, your traders or trading system make erroneous trades,

there are lots of factors that can potentially lose you money and they are all intertwined when you have a

diverse portfolio as described.

For a single cash equity indices position, ( SPY ETF, or SP EMini futures), we would categorize as

follows:

1. Counter-party default on your winning position, no since you are trading with the exchange.2. Market risk. Yes, market can move against you3. Liquidity, the risk depends on liquidity of the equity indices and your position size.

We can stop here and conclude that for this single position has mostly market risk, and produce a few risk

reports to quantify it:

1. The delta of this position in terms of underlying equity index.2. A lattice report showing how much gain or loss you would incur if the index value moves to

certain levels

3. A stress report that computes say how much you stand to lose or gain if the index drops andgains by a whopping 10% for example.

We can go further than this of course, say this is a liquid stock position, we can trace the risk that the

stock price moves against us to certain factors, general market condition, pending regulations that have

large impact etc.

Things are harder to dissect on portfolio level, for example, suppose we have only single stock positions,and they are dispersed in different sectors, in this case the delta s would span many dimensions and hard

to manage the correlation of them all. You can impose hard position and delta limits but it may penalize a

long-short strategy compared to a long only strategy. You can also create a report , tabulate your gain and

losses to different level of asset prices, and simply add up the worst scenarios to get your total maximum

exposure .

If you are running an options book, say spx 500 index options book, and you have positions on various

strikes and expires, then you have a lot more risk factors, delta risk, volatility risk, risk of time decay, etc,

then you would usually end up looking at a multi-dimensional metrics of risks and you need trading

expertise to know if these risks are acceptable at any given market condition. You can impose hard limits

on each of those dimensions, vega risks, delta risks, time decay etc, and the trader to explain his rationalewhen these risks are exceeded, but then you'd require the risk gate keeper to have keen knowledge of

market condition to judge on a case by case basis if those risks that's beyond hard limits are warranted.

Similar things apply to the bond portfolio, here the main market risk factors are the shift in yield curve in

different fashions.

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Credit risk apply to over the counter positions, there are models to calculate them, based on probability of

default, loss given default and recovery values etc.

Liquidity risk applies to most positions of course. They can be modeled via some bid ask spread.

We would devise a risk matrix, that for each trader or book, we measure quantitatively the risks in marketrisk, credit risk, liquidity risk etc as a high level overview, then you can drill down to see the market risk

details for individual portfolios, see what risks factors in the markets and their impact.

We would also run simulation of forecasted market scenarios where we re-price our total positions, and

these scenarios include defaults of key counter-parties.

2. Financing

To finance your portfolio, as a hedge fund, you probably has most of financing through short term loans

from the prime broker, you can hedge away your mismatch of asset and liabilities maturities with various

Eurodollar futures for example, or by buying or selling synthetic bonds in the market, one of the ways to

do this is to sell a box in the options market to get better financing rate.

Of course you have financing in the form of investor capital, since investor can invest more or request

withdraws, it is important to make sound terms as to how much and how far ahead they give notice, this

should give you enough time to unwind positions and pay out cash.

The goal of Cash management is to insure that manager earns maximum returns from excess cash

generated from day to day operations of the fund, as well as to facilitate management of risk in margin

accounts, and to provide cushion for liquidity reasons. The margin accounts are established by the prime

broker for exchange traded derivatives for potential adverse market moves and for PNL attritions, or for

leverage. These cash should be invested appropriately, we should do an analysis on the profiles of cashflows, their average duration and fluctuation levels, these might be dependent on the risk positions you

are holding as well, then based on maturity and volatility we can determine the optimal allocation of these

cash to meet draw requirements and ear maximum returns.