Risk management software firm Algorithmics has just launched a new risk reporting service for hedge funds in the U.S. and signed up fund of hedge funds manager Optima Fund Management in New York as its first client.
Algorithmics says that Risk Reports is a cost-effective pre-configured risk reporting service designed for hedge funds which don’t want to do the work inhouse. The service, which offers risk reports for regulators, investors and portfolio managers, was launched in July in Europe for European hedge funds, fund of hedge funds and fund administrators.
“Algorithmics’ reporting service addressed our needs to meet UCITS regulations in Europe, as well as providing Algorithmics’ analytics for our own investment reporting in a cost-effective manner,” says Geoffery Lewis, chief financial officer for Optima Fund Management in a statement issued by Algorithmics on Monday. “Following a rapid implementation we are now in a position to pursue opportunities in the European retail market.”
The service has been launched at a time when hedge funds face increased pressure from regulators to get a glimpse into the riskiness and returns of their investment strategies. Among the regulations which require hedge fund advisers to provide risk analytics are UCITS IV, the Alternative Investmnet Fund Managers Directive and U.S. Dodd-Frank Wall Street Reform Act.
The UCITS IV legislation adopted in July 2011 is the fourth incarnation of a European measure, otherwise known as Undertakings for Collective Investment in Transferable Securities, designed to help investment funds easily sell their products cross-border The AIFMD and Dodd-Frank Wall Street Reform Act, when fully implemented, in 2012 will require fund advisers when registering with local regulators to provide some indication of the health of their operations and investment risks they are taking.
Although there are some differences in the types of information required by regulators, investors and portfolio managers, there are also plenty of similarities, says Martin Botha, director of buy-side solutions for Algorithmics, recently purchased by IBM.
Among the basic metrics regulators, investors and portfolio managers are keen to know are value at risk, various exposures by currency, asset class, counterparty, and region as well as stress testing which includes historical replays, hypothetical scenarios and conditional scenarios.
Risk reports for investors will also include information on performance attribution, while those for portfolio managers incorporate risk factor attribution. Performance attribution breaks down the performance results of a manger to determine which elements of the strategy such as market timing or security selection were responsible for the results and why. Risk factor attribution refers to a process that attributes the risks in a portfolio of financial instruments clearly to the market identifiable risk factors.
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