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SunGard’s Hedge360: Risk reporting

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Hedge360’s Risk Reporting Service, as part of the platform’s managed service offering, equips managers with the tools needed to manage and effectively report risk to an institutional standard.

Laurence Wormald identifies this growing level of institutionalisation, coupled with regulatory requirements, which under AIFMD in Europe are akin to the UCITS regime, as two primary drivers for enhanced risk management.
“Hedge fund managers essentially need to mirror the same levels of risk management that institutional managers have been doing for many years. We’re very familiar with that. SunGard has over 175 institutional clients using our risk solution; we know what institutions want. We can provide a really serious level of risk reporting to satisfy the demands of institutional investors.
“With respect to regulation, we have extensive experience in what is required to produce a risk report for a UCITS fund. For any hedge fund that is thinking about moving onshore to become regulated as an AIFM, we know exactly what needs to be done,” says Wormald.
Until recently, hedge fund managers regarded risk management as a secondary exercise. But as the nature of investors post-2008 has changed a far more disciplined approach to risk management has evolved. Indeed, such are the risks to non-compliance under regulation that no manager can leave themselves exposed to a catastrophic drawdown. Staying on top of volatility, VaR, liquidity and collateral limits are vital.
“Investors want more regular risk reports to get real insights into a manager’s strategy. They want to understand the risks associated with it,” says Wormald. “This has forced everyone to up their game to report on risk across the board: market risk, liquidity risk, counterparty risk, regulatory risk and so on.
“Hedge360 has always had a strong risk capability but in the last couple of years it’s been adopted with real enthusiasm by our clients.”
To illustrate just how much risk reporting has changed, Atreaus Capital LP, a New York-based global macro manager, started to use the Hedge360 Risk Reporting Service to be able to deliver a fully customised risk reports to their investors on a daily basis; something that was previously taking too much time and money to produce.
“We’ve solved two problems for them at once: first, to create customisable reports that are integrated with the desk-level information they get on their options strategies, and second they are saving money,” states Wormald.
Another driver for outsourcing risk reporting is that it avoids having to integrate multiple systems. Aite Group’s survey found that fragmentation of technologies was cited as the key roadblock to risk management success (see figure 2).
As to what constitutes an institutional-grade risk reporting system, there are three main pillars to consider. These include: headline numbers, attribution of risk and scenario analysis/stress testing. If managers can generate reports that cover these three areas, they are in good shape.
The first step is getting the headline numbers in a timely and accurate fashion. These numbers, depending on the fund strategy, will typically include volatility, the greeks (delta, gamma and vega) if trading options, and value at risk (VaR). A more recent parameter that clients have increasingly started to ask for, says Wormald, is liquidity-adjusted VaR.
Next, managers need to report on the attribution of risk. A trader might see that the fund’s VaR has climbed from 2.3 per cent to 2.9 per cent, but why?
“They can then use a set of risk attribution analytic tools within Hedge360 to determine the contributions of every position to the overall risk profile and understand why that number might have changed. The analogy here is with performance attribution, which everybody understands.
“How does a manager achieve 10 per cent returns? Maybe 3 per cent is derived from Europe, 2 per cent from Japan, 5 per cent from the US: that’s useful post-trade information. Risk attribution is saying: ‘Okay, we don’t know the future for sure but the VaR number can at least be attributed to the portfolio’s current composition’,” comments Wormald.
The third reporting element covers the ‘what if…?’ scenario analysis and stress testing. This is where the trader shocks the portfolio under periods of different market stress, or wants to see the impact a new hedging position will have on VaR.
“Institutions expect managers to have all three parts of this regularly and automatically generated in risk reports so that investors, regulators and senior management get a clear view across the strategy. That’s what we provide with our risk reporting service,” confirms Wormald.
He adds that clients have the ability to generate risk reports on demand as well as receive them on a daily basis: “On demand means I’m sat in the office thinking, ‘Should I hedge this position? Should I buy a rate swap?’ If I decide to do the trade I want to know how it will impact the portfolio’s risk so I generate a risk report on demand. We support both daily reporting and on demand reporting with our managed service.”
Aside from the automation capabilities that Hedge360 provides to produce in-depth risk reports, it crucially supports managers across all asset classes. This is important as hedge funds evolve and adjust their strategies to tap into new sources of alpha.
“Our Global MAC (Multi Asset Class) model is very useful for hedge funds because it allows them to achieve the necessary coverage. If they want to trade new asset classes, or derivatives, then they know they are going to get a coherent view of risk,” explains Wormald.
Not only that, but the SunGard team has a deep understanding of risk which they are keen to impart to clients. Getting a second opinion on why the VaR number has risen or fallen can be empowering to the manager. In that sense, Hedge360 is more than just a powerful system; there’s a human element to it also.
“Risk is about complying with the regulators and also about demonstrating to investors and senior management that the best practices are being applied. You need the right process, the automation and the methodology: we provide all of these. Managers today are facing a step change away from producing homemade risk reports towards institutional-quality risk reports,” concludes Wormald.

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