Supporting a strong risk management framework
Innocap, the Montréal-based structuring and operating managed account platform unit co-owned by BNP Paribas and Caisse de dépôt et placement du Québec, was originally established in 1996 as the internal managed accounts-based fund of hedge funds within National Bank of Canada’s Treasury operations. Since then, the Innocap group has grown and now manages approximately USD7.2 billion in assets, structuring and operating customised managed account solutions for institutional investors globally.
As the business has developed, and managed accounts have gained in prominence among hedge fund investors, allocators’ priorities have steadily shifted. Foremost among current trends and developments is risk management, and the ways in which clients utilise data to better manage portfolio risk.
“People are really focusing on leveraging the granularity of information provided by managed account platforms to support their investment decision and allocation processes, observes Jonathan Planté, business development and investor relations manager at Innocap. Having data is one thing, but having the technology and expertise to deal with anomalies to provide clients with pertinent analysis is another.”
Expanding on this point, Hugues Bessette, Innocap’s chief investment and risk officer, identifies three key areas where risk management has developed among allocators to enhance transparency and controls: cash efficiency, risk analytics, and the ability to better utilise data and position-based information to manage risks.
Bessette observes that cash efficiency has become a key element for investors. Lowering both the risk and the cost of launching new strategies by implementing dynamic cash management policies helps investors to gain more control over their allocation.
“By implementing cross-margining, Innocap has the capacity to create an optimal trading structure. Supported by a strong risk framework and oversight process, our front-office approach aims at decreasing investors’ cost of financing and cost of trading. It eventually helps them to deploy capital more efficiently,” he explains.
The second key area is risk analysis. “Investors want the ability to move beyond asset class exposure analysis, or dollar allocation reporting. They want the ability to slice and dice their portfolio using any type of classifications, and have the possibility to develop and adapt their risk or reporting framework according to the underlying risk return profile of the strategy – whether it is CTA, long/short equity, long/short commodities, or global macro.”
Different hedge fund strategies require different risk frameworks, and so investors now demand the ability to analyse their portfolio in a way that reflects the underlying market volatility. Expanding further on this burgeoning desire for more customised and bespoke products, Bessette continues: “You don’t analyse a long/short equity in the same way as you would a global macro portfolio. That ability to better understand the underlying risks of those strategies based on the investment decision processes and manager behaviour is extremely important to investors.”
He adds: “The third key area is data, and the ability to increase transparency by summarising all positions and underlying market risks as a comprehensive reporting framework or, if possible, as a single graph. Investors are now expecting to have the same level of transparency and control on their external portfolios as they have on their internal allocations. ”
As a long-established independent business dedicated solely to providing managed accounts, Innocap’s focus rests squarely on its core function, says Planté.
“We only do managed accounts. We have no incentive in selling hedge funds. We are not a consultant, we are not a hedge fund manager and we are not an administrator. We don’t have any additional services that we try to cross-sell.”
Warming to this theme, Planté believes the firm’s long-standing strategic focus ultimately gives the business an edge over many of its competitors in the managed accounts space.
“Our approach is entirely customisable. Thanks to the structure of our business model and technology, we are not constrained to just operating in the hedge funds industry. We are also very active in the private equity, infrastructure and private credit space.”
He continues: “The diversity of our talents is our strongest asset to internalise all the managed account platform functions, making us more independent than other providers. We believe that this operating model eventually benefits the clients as it always drives our operational costs down.”
At the same time, this dedicated approach also allows Innocap to offer additional value to allocators throughout the various stages of the decision-making process – defined by Bessette as pre-funding, onboarding and post funding; three phases he says are vital to investors when it comes to risk allocation and management.
“Pre-funding analysis is the ability to complement the investor selection process before the onboarding phase,” he explains. “Our position-based analysis focused on the risk allocation process and market risk management. It is a deep-dive into the portfolio construction and trade-sizing, drawing in risk exposure and diversification across time, across regions and across instruments. We also analyse managers’ trading skills, expertise and behaviour in order to better understand trading patterns relative to market regimes and whether or not manager decision adds value to the portfolio. The pre-funding analysis also covers liquidity of trades, capacity, and trading costs analysis. Those analyses are done before the client allocates capital to the hedge fund. It’s a great complement to investors’ due diligence process,” Bessette adds.
He continues by explaining the next phase: “Post-onboarding analysis is our ability to adapt, provide greater control and offer an enhanced transparency to investors, going far beyond traditional risk measures. Our philosophy is to develop customised risk frameworks, including behavioural analysis, to significantly improve the understanding of changing underlying risks. This approach allows us to deliver significant value to investors.”
Looking ahead, talk turns to the challenges and opportunities for managed accounts in the coming decade, as well as the potential barriers to growth for the business.
For Planté, a major focus continues to be on education among industry participants on both sides of the allocator-manager equation, as managed accounts increasingly take centre-stage among hedge fund allocators. “Education and perception is our top focus. While the term “managed account” has been widely used for decades, there is still a misunderstanding around this notion and the services provided by a managed account platform. Combined with the fact that some providers are misleading asset allocators on the nature of managed account platform services and their benefits, it makes it difficult for investors to navigate through the industry.
He adds: “While many investors are very knowledgeable in that field, others need more support. Being part of this ecosystem, we believe it has the responsibility, as should every player, to assist investors in better understanding the different options that are offered to them for them to take an informed decision”.
Chief Investment & Risk Officer, Innocap
Hugues Bessette joined Innocap in 2017. In his current role, he is responsible for supporting Innocap’s client allocation decisions, strategy implementation and portfolio investment and risk oversights. Prior to joining Innocap, Hugues was a Managing Director, Public Market at PSP Investment for 12 years, where he managed two active absolute-return investment strategies and Public Markets’ overlay portfolio. During his career, he gained valuable experience as a Strategist, at Bear Stearns International in London where he worked with Central Banks and Hedge Funds in developing investment strategies in rates, credits and currencies. Hugues also worked at CN Investment as a Fixed Income portfolio manager and National Bank of Canada, in the Treasury department. He holds a Bachelor’s degree in Actuarial Sciences, Master in Finance and CFA designation.
Manager, Business Development, Innocap
Jonathan Planté is Manager of Business Development and Investor Relations at Innocap, which he joined in 2013. In addition, he currently lecturers at HEC Montréal, where he teaches hedge funds to graduate students. During his 10 years in the alternative investment industry, Jonathan held various positions in both Europe and North America. His qualifications include a graduate degree in Finance from HEC Montréal, a master’s degree in international business development from ESC Saint Etienne as well as the CAIA designation.