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Le Marois: Riskdata identifies risk while protecting proprietary information |
New technology is being developed to make hedge funds more transparent to investors. Risk management system provider Riskdata and Equalt, the alternative investment arm of Crédit Agricole Indosuez, are developing software to enable institutional clients to simulate the risk profile for different combinations of funds before they invest. They are working on an application for Riskdata’s online risk management system. Initially it will enable investors to test how the Equalt fund would fit with their portfolios. “It’s like opening a window on what we have on the book without disclosing actual positions,” says Christophe Turpault, manager of Equalt’s fixed-income arbitrage fund. This gives institutional investors more transparency about the risk of including funds in their portfolios. At the same time it allows the manager to protect the funds’ positions.
Riskdata and Equalt want investors to be able to blend funds to discover the impact such strategies will have on their risk profiles. “Take a fund selection company,” says Turpault. “They have proposals from more than 1,000 funds. Imagine if they [the funds] all contribute their risk ticker [risk characteristics] to a central platform and they [fund selectors] can use it. Just like I can drag and drop the risk tickers from the S&P, or any financial instrument.”
This would make it much easier for a fund selector to blend funds and analyze how much risk diversification they would have without actually investing. However, testing the risk impact on a portfolio by blending different hedge funds will require these funds to make the risk characteristics of their portfolios available to investors.
The new software is being tested with prospective clients and within Equalt. “We’ve been testing the software on other funds internally. We are able to create a small fund of funds with three funds and stress it,” says Turpault. He gives an example: “If oil collapses, how, if I have 33% of each of these three funds, is the global performance going to be affected by a drop in oil prices? And I have the answer in 20 seconds.”
Riskdata’s risk management system is an online tool that enables asset managers to analyze and track the risk in their portfolios and to test the risk impact of events and the addition of particular assets.
Similar systems, such as RiskMetrics, exist but Riskdata does not require the manager to disclose its positions by sending them to Riskdata in order for them to be analyzed. Riskdata CEO Olivier Le Marois, says: “Riskdata is the only online risk solution which allows the client to remain in control of all their proprietary information.”
Hedge fund managers shy away from exposing the positions in their funds. This has made it difficult for managers to be transparent about risk profiles. “We want to go through the metal detector but not have to take our pants off,” says Turpault.
Equalt launched its new fixed-income arbitrage fund in March and announced the integrated Riskdata’s online risk management system into its investment process in April. The new fund has a scope of more than 10 currencies and over 20 countries with a focus on government bonds.
Testing extreme outcomes The alternative investment manager uses the system to carry out scenario testing. “During the Iraqi war we’ve been testing the portfolio with extreme, but plausible, possible outcomes of the Iraqi war and the impact on the market, mainly seen in non-fixed-income parameters, like oil and gold,” says Turpault. More specific to fixed income, for example, Equalt has used Riskdata to ask “what happens if the ECB lowers rates by 50bp?” and to analyze the impact it would have on its fund.
The Equalt team comprises former proprietary traders that managed prop trading and the interest rate desk at Crédit Agricole Indosuez. Over the past year the team has been reconstituted as hedge fund managers.
The Riskdata system was launched in France in March 2002 and in the UK in March this year. Other clients include BNP Paribas Alternative Investment and fund incubator Finaltis, as well as fund management firms Société Générale Asset Management and ISIS Asset Management. Half of Riskdata’s clients are alternative investment firms and half classical asset managers, with half of these traditional managers using Riskdata for alternative investment business.
