Risk protection to help focus on alpha
Everyone’s talking about risk. Investors are asking about it, and it’s no longer enough that managers simply report on risk. Now managers have to explain to investors how risk enters into their investment process, including idea generation and risk monitoring.
The importance of assessing and mitigating risk, especially in these times, shouldn’t be underestimated. SunGard’s APT, a risk model provider with a 20-year track record and more than 200 clients among alternative and traditional asset managers, recently won the Best Risk Management Software Provider award at the Hedgeweek Awards.
In the alternative investments space, APT’s clients are both managers of single hedge funds and funds of funds, as well as some fund administrators and service providers helping managers distribute risk reports to their investors. In terms of the investment process itself, the right risk tools can help skilful fund managers to create alpha - for example, by uncovering the common factors that drive asset prices, they can expose ‘unintended bets’ in the portfolio, or by suggesting ways to optimise the portfolio around the manager’s chosen picks.
Volatile markets are testing not only for fund managers, but also for risk methodologies. When markets are predictable, everyone’s risk models will come up with about the same measures. But events like those of 2008-09 are a stress test for everyone’s methodologies, and they really allow you to identify which models are able to keep pace with high volatility and structural change in the markets.
Here methodology is at a premium, but it is nothing without empirical testing. At APT we continuously test the performance of our models. Among the things that we found, our fat-tailed measures (of value at risk, portfolio volatility, beta and tracking error) were significantly more capable than traditional normal-distribution measures of predicting portfolio risk during periods such as September 2008.
Over the past few years, service providers have also been realising that risk reporting has become a much more important service for their clients. Regulation and compliance is now at the heart of any successful investment strategy, and for this, good risk management and reporting software should ensure that its products can deliver the information and analysis that managers will need. Apart from ‘guarding’ the risk, it should also have the ability to meet all client requirements. And with rapidly growing investor sophistication, a sound and flexible risk strategy is a must.
APT’s approach is to offer maximum flexibility - anything from our ASP service where you only need to provide a spreadsheet listing your positions to desktop software with fully interactive drilldown, attribution, scenario, optimisation and idea-generation functionality, risk data that can be incorporated into funds’ proprietary and third-party systems, and APIs and developer toolkits.
Going forward, we’re pushing in several areas. We are always trying to improve the way in which APT fits into the customer’s workflow. We are enhancing our optimiser functionality to build into the algorithm the degree of confidence the manager feels about their alpha bets. We are also strengthening fixed-income coverage and working on unified performance and risk attribution.
Paul Compton is head of product management at SunGard’s alternative investments business
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