Prising out the information
Risk is perhaps the most important consideration for trustees and investors before they give the go ahead to any hedge fund investment. And while this is reasonable enough, there’s also an understandable reluctance on behalf of hedge fund managers to disclose their positions, fearing they might be compromised.
As the number of hedge funds and hedge fund providers continue to swell, so the tools with which to measure risk continue to proliferate. Measurisk was founded in 1997 as a provider of risk management software for financial institutions and one of its main products is hedge fund analysis. According to CEO Kelsey Biggers, one of the advantages of Measurisk is that it is a third party, able to offer objective analysis of hedge funds that can then be used by institutions considering making their first investment.
The approach Measurisk takes is to measure downside VAR opposed to potential upside and in practice it compares marginal and absolute VAR. In other words it analyses the risk being taken by a manager (VAR) and then measures the marginal VAR which allows you to gauge how various managers fit into the overall portfolio- how risky the overall package is with and without a certain manager. Says Biggers: “We don’t want to do manager search or investment consulting. We take a quant approach and are number crunchers.”
Last November the World Bank selected Measurisk to provide risk analytics for its hedge fund portfolio, as did Blackstone Alternative Asset Management, part of the Blackstone group, in March. InvestorForce, the online manager search platform, has also embarked on a venture to offer online risk monitoring for institutional funds.
One problem with providing risk analysis though is that it requires hedge fund managers to disclose their positions. Put bluntly by Derek Doupe, associate director of alternative investments at Frank Russell: “if you’re putting rubbish in you’re not going to get valid results out at the other end.” If all the data is available, analysing risk is relatively straightforward. And here lies the problem.
The rationale behind risk analysis is to reassure institutional investors before they invest in hedge funds. If the funds were desperate for assets they might be more willing to disclose sensitive positions to a third party. As it happens, they are not and there is excessive money chasing too few funds with a decent track record.
Enter GlobeOp Risk Services, launched in January 2000 and a subsidiary of GlobeOp Financial Services, a provider of support services and administration for hedge funds, who believes it has overcome this problem. According to Hans Hufschmid, CEO of GlobeOp Financial Services, it is access to hedge fund data that sets them apart. “We see the heart of the hedge fund, we see exactly what they do. Every time they execute a trade we see it. Every time they make a payment we see it, ……we know all about their infrastructure because it’s our job to do it,” he says.
GlobeOp then uses the data to offer risk reporting services on almost every hedge fund strategy to relevant parties at a fraction of the in-house cost. And again Hufschmid stresses that to execute the best risk analysis, it is better to have access to the machinations of a fund rather than rely on the underlying data. “Even if the hedge funds give the data for all their trades and all their positions,” he says, “you don’t know whether they are right or not, you don’t know whether you have all of them and you don’t know whether or not they are reconciled.”
Despite this GlobeOp believes that hedge fund managers now accept disclosure as necessary to improve the reputation of the industry, to access larger, more stable pools of capital and to obtain better financing of positions with prime brokers.
Doupe says that if the whole industry wants to become more institutionalised, hedge fund managers will have to disclose their positions. “I don’t know how realistic this is but it’s always been the same problem for third party information vendors- how to get people to supply them with the data.”
“Where’s the incentive for the hedge fund to give out their trading positions to a third party group at the moment? They might give it to individual multi manager firms or individual investors if they are of a sufficient size. But to give it to a third party data provider – there isn’t an incentive there for them at the moment,” he says.