Risk Assurance for Hedge Funds Using Zero Knowledge Proofs

Abstract. This work introduces a new tool for a fund manager to verifiably communicate portfolio risk characteristics to an investor. We address the classic dilemma: How can an investor and fund manager build trust when the two party’s interests are not aligned? In addition to high returns, a savvy investor would like a fund’s composition to reflect his own risk preferences. Hedge funds, on the other hand, seek high returns (and commissions) by exploiting arbitrage opportunities and keeping them secret. The nature and amount of risk present in these highly secretive portfolios and hedging strategies are certainly not transparent to the investor. This work describes how to apply standard tools of cryptographic commitments and zero-knowledge proofs, to financial engineering. The idea is to have the fund manager describe the portfolio contents indirectly by specifying the asset quantities with cryptographic commitments. Without de-committing the portfolio composition, the manager c...

• Type: Conference
• Year: 2005
• Where: FC
• Authors: Michael Szydlo
• Keywords: FC 2005, Fund Manager, Investor, Portfolio Risk Characteristics