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Foreign Exchange

Risk managing the black box

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."

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