Evaluating and managing risk
The past year-and-a-half has been particularly difficult for alternative investment professionals. Many traditional quantitative risk assessment tools couldn’t help save investors from performance losses, while qualitative risk measures did not account for liquidity problems, gates and fraud.
During this period PerTrac Financial Solutions has talked extensively to clients about the changes they expect in the wake of the financial crisis and market turbulence, and we’ve concluded that new tools are necessary to bolster risk mitigation, manager research, evaluation and management.
Historically, quantitative risk analysis has relied on traditional measures based on normal distributions. While useful to a degree, these measures do not encompass more complex characteristics of alternative investment return streams, such as fat tails, skewness, kurtosis, and non-normal correlation analysis.
In addition, position-level information can be difficult to obtain and interpret, especially for more complex strategies. Position-level data needs to be practically real time to provide optimum analytical value, otherwise investors can end up “chasing ghosts” of positions (and risks) that no longer exist. Even if managers embrace this level of disclosure, at a cost of low to mid-six figures the systems are not an option for many investors.
Extensive interviews with clients including endowments, foundations, pension funds, sovereign wealth funds and funds of funds helped us determine that a new breed of risk management system was needed. Investors need a returns-based system that can evaluate information from managers but still allows them to decompose the risks and returns of opaque investments – at a more widely affordable price.
PerTrac's answer is RiskPlus, an advanced risk module offering highly sophisticated, academically proven modelling of risk factors that are pertinent to alternative investments. It produces critical information on managers and portfolios, such as the potential for losses during periods of market stress, and expands investors’ knowledge about managers both quantitatively and qualitatively. Priced between USD12,500 and roughly USD20,000, RiskPlus will offer investors on tighter budgets access to some of the sophisticated tools used by larger investors.
The past 18 months have also highlighted transparency issues. At present, most investors receive qualitative information on their hedge fund investments, such as geographic and sector exposure and leverage data, weekly or monthly in .pdf format.
Re-keying information from these .pdfs is both a time-consuming and error-prone process. Our response is PerTrac P-Card, a system for the direct, efficient transmission of transparency and risk information between managers and investors. Managers are able to provide daily, weekly and monthly returns as well as exposure and other information via encrypted email directly to investors and prospects. Recipients open the e-mail attachment and instantly have access to information in an electronically usable format. The P-Card Generator software is free to any manager, and any user of the PerTrac Analytical Platform can receive and decrypt the information.
P-Card increases efficiency without which increased transparency is of somewhat limited value – if an investor must spend valuable time entering information rather than analysing it, it is very possible to miss critical signals. Currently installed with more than 225 funds and 250 investors, the system has been adopted as the preferred data collection method of the Managed Funds Association.
Risk remains a key concern globally for investors large and small. With the right tools, evaluating and mitigating those risks is a less daunting task.
Meredith Jones is a managing director and head of global marketing at PerTrac Financial Solutions
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