In the constantly evolving hedge fund marketplace, nothing is more central than risk. Yet, there remains no standard for analyzing and measuring risk within this highly secretive, largely unregulated field. The structure of the thesis is five-fold. The first part consists of a brief case study of – Long Term Capital Management. In the second part, general information on the hedge fund industry will be discussed. Besides a definition of hedge funds, the chapter also talks about data biases, leverage and short selling. The third part mainly focuses on the return component of hedge funds. Special emphasis is put on risk-unadjusted and risk-adjusted performance measures. The fourth chapter is dedicated to all different kinds of risks that are inherent in hedge funds. The last part provides an in-depth analysis of modern risk management for hedge funds. The different risk measures are divided in the four sub-chapters: risk measures that are relevant to investors, to managers or to both. A fourth sub-chapter describes the most important active risk management techniques that are currently applied by hedge fund risk managers.