The Credit Suisse 2015 hedge fund investor survey provides some insight on the fears of hedge fund investors. It is not higher volatility. It is not monetary policy. Nor is it geopolitical risk. The number one issue is risk from crowded trade and herd behavior. Th number two issue is market liquidity. These may seem odd at first, but it actually shows a deeper understanding of risk in alternative investments.
There has not been enough work on defining crowded trades. We do know that is a bigger problem and hedge funds get larger. It is an uncertainty and not a risk that can be measured. We can look at SEC reports and commitment of traders, but there is a dearth of information on what hedge funds are doing in aggregate. Hedge funds want it that way, but it also increases the uncertainty faced by investors of what the hedge fund industry is doing in a sector or name. Transparency with a manager can tell what that firm is doing, but it cannot tell us what the crowd is doing.
Tied with crowded trades is liquidity. If everyone is thinking the same, there will be no liquidity. This a fear in even the most liquid markets. The big risks have been identified, but there is no easy solution on how to address these concerns by hedge fund investors.
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