New York-based Liquid Holdings Group has developed a real-time risk analytics solution for those who manage multiple accounts, traders or strategies, and as a result require an aggregate view of market and liquidity risks. The new solution, LiquidFIRM (Financial Intermediary Risk Management), is the latest addition to Liquid’s cloud solutions and services.
“LiquidFIRM is unique in that it allows intermediaries to manage both pre-trade compliance and post-trade risk across underlying mangers and strategies. It empowers the intermediary’s risk oversight desk to do things like limit the buying power of certain managers, put fat finger checks in place and so on, all while running real-time post-trade analytics that take into account the latest confirmed transactions,” explains Brian Storms (pictured), CEO at Liquid Holdings, adding that those who will benefit most from LiquidFIRM are prime services firms, clearing firms, SMA platforms and proprietary traders.
A prime services firm (that is, a boutique prime) is required to go through a large clearing firm to process trades and provide margin to hedge funds. One of the key issues for clearing firms is making sure that the boutique prime has a full handle on the market risk being taken by their hedge fund managers. As Storms points out, “many boutique primes do not have their own risk systems and rely on those used by their clearing firm.”
“LiquidFIRM allows our clients to take a high level look across many accounts. It then tests each account for market moves, stresses and shocks, liquidity problems or concentration issues, i.e., whether a manager has too large a position in a single name, sector or country. LiquidFIRM can look at things on an individual account basis as well as across multiple accounts, which allows our clients to respond to alerts as they arise,” explains Charles Sweeney, who brings over thirty-five years of risk management experience from Goldman Sachs to the product management team at Liquid.
Because it does this in real time, LiquidFIRM is an effective early warning system. SMA platforms are particularly keen on the solution. Like the boutique primes, they need to ensure that each manager stays within the risk parameters set out in the mandate.
“Assume an allocator invests USD1 million with a hedge fund client and one of the conditions of the allocation is that the fund manager cannot breach certain parameters at any given time. If I shock the book X percent, the portfolio needs to be able to handle it. What’s helpful with this solution is that managers can also use these same analytics to actively monitor their trading activity, market and liquidity risks,” says Sweeney.
LiquidFIRM is also highly bespoke. For example, the portfolio would typically be shocked up and down 20 percent. However, if a manager prefers 22.5 percent, the risk parameters can be adjusted accordingly, says Sweeney.
“As portfolios become more complex, it’s difficult to continuously know what risks you have. LiquidFIRM takes that into consideration. As it shocks the portfolio up and down it also revalues the options, the equities, the futures. It’s something that you couldn’t easily do by yourself,” adds Sweeney, confirming that other asset classes such as fixed income will be incorporated into the solution going forward.
“When investors or regulators want to see what controls a firm has in place, risk management is at the top of the list. Firms need to answer that in a really robust way,” concludes Sweeney.
LiquidFIRM is certainly going some distance to providing that answer.