Risk Measures

How risky was it? Yes, you won the lottery, but that million dollar payout over 20 years was a 1-in-a-billion shot, and you were just ungodly lucky. Good risk? No. Luck? Yes.

Risk measures are big pretty much everywhere in everything, but in hedge funds, there's actually a role called Senior Risk Officer, or something like that. This is the person who did something very bad in a former life and now must be punished by having to have this job. All day long, like Sisyphus, he pushes a risk rock up a hill, making financial what-if models. If a bomb hit Riyadh, what would happen to the hedge fund's portfolio? If peace suddenly broke out everywhere, what would happen to the portfolio? If it turned out that the largest position exposure investment was revealed to have had fraud, what would happen to the portfolio?

Those are all risk measures, which incorporate hedges of all flavors and scenarios that must make money for investors. If they don't, the hedge fund loses out on its lavish 2 and 20 fee structure, and their world comes to an end. Think: Uber driver.

See: Sharpe Ratio.