For regulators and professional investors alike, it has never been so important for hedge funds to demonstrate a smart, rigorous and integrated approach to risk management as it is today.
While investors continue to join the alt-fund queue in search of alpha returns, the lack of an effective risk strategy can be a deal-breaker. Increasingly, to attract investment capital, hedge funds must provide an independent and fully validated view of risk,
with risk analysis and reporting that encompasses the entire reporting process.
Meanwhile, numerous financial reforms, including the Alternative Investment Fund Managers Directive (AIFMD) and the Foreign Account Tax Compliance Act (FATCA), have taken effect to improve the quality and frequency of data that alternative asset management
firms report. These regulations are driving hedge funds to seek more effect methods of reconciling data and reporting on risk.
Additionally, risk reporting platforms must be flexible enough to accommodate fund managers’ constantly evolving and highly complex allocation strategies, which typically cover diverse asset classes and many different global jurisdictions. Using scenario analysis
and pre-determined or tailored explanatory factor models, firms should also be able to view the possible repercussions of macroeconomic or sector “shocks” on their portfolio.
Above all, hedge funds want risk tools that can get the job done quickly and cost effectively – while, for client retention, demonstrating institutional-grade risk reporting. In a recent survey, Aite Group found that having robust investment management technology
is a prerequisite to maintaining operational efficiency. By augmenting existing systems and streamlining processes using automation, firms are better able to meet investor and regulator demands for data granularity and transparency. Also vital are tools that
mesh seamlessly with existing compliance, trading and other technology solutions to generate the “right” risk data.
Even with the best risk management system, risk reporting represents a heavy responsibility for today’s hedge funds – but not one they need to bear alone. To manage growing challenges, increasing numbers of hedge fund managers are taking a managed service –
not only ensuring proper system integration but also enabling data to be enriched and validated for reliable risk reporting. Handling all these processes in-house usually requires a large risk management team and significant overheads. With a managed services
model, all the necessary tools, analytical capabilities, data management skills and overall risk expertise come as a cost-effective, highly efficient package – leaving fund managers to concentrate on their core strengths.
At the same time, using properly configured factor models, hedge funds will gain a much more intuitive view of performance and risk across their entire portfolio, putting them in a stronger position to make investment decisions. A hedge fund risk managed service
will also help keep pace with changing regulatory demands.
Ultimately, the presence of a globally recognized service provider can bring an added layer of comfort to investors, particularly within the compliance-heavy alternatives space. So, by sharing their risk reporting responsibilities with an expert, hedge funds
will be sufficiently poised to expand their base of clients and assets under management.