Guarding against hedge fund fraud
Last month, fund of hedge funds Prisma – which has more than $1.3 billion in non-discretionary assets under management – announced that it had chosen Riskdata’s risk management product to manage its fund’s risk. This kind of move is becoming increasingly popular among funds of hedge funds, so third-party risk management providers are gaining ground in this large segment of the hedge funds arena. Many of these funds of hedge funds use services such as those provided by Riskmetrics, Riskdata, GlobeOp and Barra in addition to, or in place of, in-house risk management systems.
There are two types of risk management products available. One does not rely on the third party gaining full position transparency from the hedge funds while the other does.
Riskdata and Barra both offer products that do not require full transparency of positions. Riskdata looks at what risk the hedge fund is taking based on the past performance of the fund and its relation to past market movements, rather than its current trading positions.
Olivier Le Marois, CEO of Riskdata, says: “We created a product to deal with less transparent funds.” The system also caters to funds providing different levels of transparency. “It enables risk transparency no matter what the transparency of the underlying fund,” he says.
The need for detail
Prisma’s head of risk, Emanuel Derman, says his firm decided to use Riskdata’s FOFiX system precisely because hedge funds don’t provide much transparency. “Riskdata is looking at the bigger picture,” he says. “You have trouble managing hedge fund risk if you don’t have detailed [information on] positions. Riskdata takes a good shot at telling you something about how the fund will behave when markets move, but without positions it cannot tell you everything. You have to step back and see if it makes sense.”
Derman says his firm is also considering using additional risk management systems alongside Riskdata, including those that require full position transparency. Such providers include, for example, GlobeOp, Bear MeasuRisk and RiskMetrics. “[These types of risk management providers] are getting positions and doing detailed analysis of scenarios and value at risk. That’s more accurate but you can’t do it for your entire portfolio because you can’t get the transparency [from all hedge funds],” he says.
