Offloading the risk management headache

Up to around a decade ago, risk management solutions were extremely expensive and available only to the largest financial institutions such as central banks, pension funds and investment houses. Because of the costs, expertise and resources required, risk management was inaccessible and unaffordable to the rest of the investment industry.

But around 2000 the advent of commoditised computing power and the increased availability and capacity of the internet were making it possible to centralise the complex and previously highly expensive elements required to run a risk analysis application into an on-demand, networked engine offering access to these resources at incremental cost for all users.

The breakthrough idea that gave birth to Portfolio Science RiskAPI - a distributed risk engine extending access to risk management capabilities from the largest and best-capitalised institutions to every investment industry player - was the use of an application programming interface (API) that allowed users to access exposure calculations through standard operating environments, starting with the ubiquitous Excel spreadsheet application.

APIs normally allow users to customise software by developing code that can access and manipulate the software's features. Portfolio Science's RiskAPI takes the concept a step further by using a standardised interface to connect securely over the internet to a risk engine running on the firm's servers. With Excel, any user with the company's client software component and a subscription to the service can execute a broad spectrum of risk analysis calculations on their portfolios and positions - at an extremely affordable cost.

This approach differs from the web-based strategy for providing risk management services offered by other industry players. For a web site to deliver an application such as risk reporting entails complex, costly and extremely time-consuming integration to allow the delivery of portfolio data to the site. This also raises security issues since the fund manager client is exporting extremely proprietary methodology and data to a provider that is a software company, not a bank or a brokerage. RiskAPI leaves the client as custodian of the portfolio data, merely making calculation requests to the system, where nothing is integrated or stored.

The standardiszation of web-based applications and the difficulty in offering high levels of customisation is a distinct drawback for users that are highly demanding both technically and in terms of usability. By contrast, the RiskAPI service allows users to pick and choose the calculations they want, how they parameterise them, how they display them and what they do with them. This offers the flexibility of an in-house solution without responsibility of managing data feeds and algorithms, assuring reliability and delivering computing power.

This service is particularly suited to the needs of hedge fund managers, which are by their nature early adopters of technology, nimble and typically combining a comparatively small staff with the technological requirements of bigger organisations - including risk management needs for a handful of people as great as those of large mutual fund companies.

Today the RiskAPI model encompasses a broad range of asset classes and multi-model, multi-parameter, multi-view types of calculation geared to a diverse set of market demands. And increasingly the system has users with very similar requirements to hedge funds, such as investment bank prop trading desks, as well as prime brokers and administrators that offer their clients risk management completely embedded within existing reporting services.

Ittai Korin is president of Portfolio Science