Advanced Derivatives Strategies for Hedge Fund Risk Management

David is the chief investment officer (CIO) of a hedge fund that primarily invests in emerging market equities. Due to geopolitical tensions and rising inflation rates in various emerging markets, he is concerned about potential downside risk to his portfolio. He is considering utilizing various derivatives strategies, including options and futures, to manage this risk effectively.

In this context, your task is to develop a comprehensive risk management strategy that employs derivatives. Address the following points in your discussion:

• Explain the types of derivatives that can be used to hedge risks associated with emerging market equities.
• Discuss the advantages and disadvantages of each type of derivative in the context of managing portfolio risk.
• Evaluate the implications of implementing these derivative strategies on liquidity, counterparty risk, and potential impact on portfolio performance.