Investment boils down to the very simple concept of risk versus reward. Investors, in aggregate must be compensated for the risks embedded within a particular security. Although risk is subjective and varies die to differences in valuation technique, reward is universal. Investors are constantly seeking investments that offer the highest returns given the risk. In particular, due to market inefficiencies investors are often looking to achieve "Alpha." Alpha is simply a return achieved above the required return. In this pursuit of higher returns, investors risk losing large sums of money as unforeseen events occur. Chart 1 provides a visual representation of this concept.
Investors, seeking higher return must unfortunately take higher risk. Risk in this instance is NOT defined as Beta as many academics use. Instead, here risk is defined as the propensity for permanent capital loss. As investors move further left, notice the variance of returns becomes larger. Although the return could be potentially be higher so to could the loss. This makes intuitive sense. If all risky investments yielded a higher return, then by definition they would not be risky. The potential for permanent loss is what makes investment risky. Chart 1 above represents this concept masterfully.
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Risk Management in Hedge Funds A research of how dissimilar hedge fund managers identify and achieve risk The most vital lesson in expressions of Hedge Fund Management comes from the inadequate name of this kind of alternative investment that is an alternative: The notion that all methodical risks are differentiated away is not really applicable here, with the Hedge Fund returns, in realism, representing a mixture of superior administration of market
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