Over the past year hedge funds have boomed. An estimated $8.4bn (€ƒ9.2bn) flooded into the sector in the second quarter of this year, and new alternative investment firms seem to appear on a weekly basis. But as capital flows towards hedge funds, there is a growing demand for greater transparency in their activities. Investors now want to know about their risks as well as their returns. To meet this demand, a number of online risk measurement providers are emerging, some of them in alliance with database services that aim to help pension funds and other investors find and select hedge funds.
Risk analysis is a highly specialised task, requiring the gathering of all portfolio data, its standardisation and aggregation and the application of sophisticated analytical algorithms. The technology to do this is expensive and complicated and few hedge funds have the resources or inclination to install it in-house. However, the internet has provided a model whereby third-parties can set up as application service providers (ASPs), making the technology available online.
Some organisations that are already providing services to hedge funds, such as prime brokers and custodians, are adding risk analytics to their offerings. They have an advantage in that they already have access to much of the relevant data. Some risk technology companies are also setting up services and some dedicated ASPs have emerged.
The longest established risk ASP is db RiskOffice. Originally a bureau service set up in the mid-1990s by Bankers Trust, it was acquired along with the rest of BT by Deutsche Bank and is used primarily by Deutsche’s custodial clients. Acknowledging the trend among hedge funds to use more than one custodian (and often multiple prime brokers as well), Deutsche will now also collect data from other custodians in order to analyse a firm’s full portfolios.
Recently, there has been increased interest in the service from hedge fund clients “because of their requirements to disclose risk factors to their customers,” says Michelle McCarthy, managing director for db RiskOffice, and the bank has been enhancing the service for their needs. db RiskOffice provides risk factor exposure measurement and Monte Carlo-based value-at-risk.
“Our db RiskOffice service is appealing to hedge funds clients because it requires little infrastructure or staffing on their part to create reports,” says McCarthy. “We can consolidate holdings from one or more prime brokers or administrators and produce risk reports that can be used by the hedge fund and/or distributed to its investors. Because these reports are delivered over the internet, they are a convenient way to achieve transparency.”
Like db RiskOffice, New York-based Measurisk provides online risk measurement to a range of customers and this year set up a service aimed specifically at hedge funds and their investors. Called FundScape, the service was created with the help of World Bank which was looking for a means of getting risk information on the 30 or so hedge funds in which it invests. FundScape provides monthly value-at-risk and other exposure statistics. First to sign up for the service was New York and London-based fund of funds Blackstone Alternative Asset Management.
Aimed specifically at the hedge fund sector is PlusFunds.com, a web-based platform that provides independently verified real-time net asset values of hedge fund portfolios and a range of risk measures, calculated by Standard & Poor’s, such as value-at-risk, historical stress tests and risk concentration analysis.
PlusFunds.com also lists its hedge fund customers on the Bermuda Stock Exchange, creating a secondary market in their shares for non-US investors. So far, over 18 funds have signed up for the service, including investor advisors Consulting Services Group, based in Memphis, Tennessee.
GlobeOp Financial Services is a hedge fund online back office specialist based in Harrison, New York and London. It has also recently launched a risk analytics service. GlobeOp Risk piggybacks off the company’s main service, which collects and reconciles data from prime brokers and counterparties, calculates net asset values and performs other back office functions. Risk services include position reporting across a wide range of asset classes, liquidity risk modelling, value-at-risk, style modelling and risk concentration analysis. The service can provide full or aggregated risk reports to investors and risk analysis to the funds themselves.
GlobeOp Risk’s style analysis looks for the main factors that affect a fund’s exposure and examines historical profit and loss attributions. “The analysis enables you to understand what trading style a manager has at a given date, while the P&L attribution tells you where the money was made in the past, how much was made on macro trading, how much on relative value trading and so on,” says Jerome Barraquand, managing director of GlobeOp Risk. “This kind of analysis is very valuable to investors.”
GlobeOp Risk already has hedge fund customers using the service, which it will not name, and expects a number of firms that are using its back office services to start using the risk service in the coming months.
Several prime brokers, such as Credit Suisse First Boston and Morgan Stanley, and custodians, such as State Street and Northern Trust, are now also providing risk analysis as an added service to their customers. Although these services are not aimed primarily at investors, hedge funds which make use of them can use the information to provide transparency on their activities.
But before pension funds start scrutinising the risk figures, they have to find the hedge funds in the first place. A number of online services are emerging to assist with this search.
London-based TASS Research, a part of global alternative investment advisory and information services provider Tremont Advisers, based in Rye, New York, maintains a database of over 2,000 hedge funds, plus a “graveyard” of around 1,000 funds that have gone out of business. The company’s chief executive officer Nicola Meaden says that it is important that investors are aware of the funds that failed as well as those that have succeeded.
Investors pay an annual fee and can access the TASS database via the web or receive regularly updated copies on disk. The 300 or so items of data on each hedge fund includes information on management, investment style and sector, custodian and so on. (TASS Research also monitors the flow of capital in and out of funds and it is the company’s estimate that appears at the beginning of the article.)
An abridged version of the database is also available on a new hedge fund information web site, HedgeWorld FundSelect. This US-based service invites hedge funds to register their details on the site which will then be made available to international investors. In addition, the site offers analytical tools and research services for investors. The company plans a full launch its service this quarter and says its aim is to “become the premier online destination of investors seeking to allocate assets to quality alternative investments.” But the company has competition.
Van Hedge Fund Advisors International, based in Nashville, Tennessee, has built up a database of around 3,400 funds. The company will also help investors construct customised hedge fund portfolios. It also compiles hedge fund performance indexes by style and market sector.
Also competing for investors attention is InvestorForce, based in Wayne, Pennsylvania and funded by California Public Employees’ Retirement System and Thomas Weisel Capital Partners among others. It is an electronic platform for investors and consultants in the US, UK and Europe to conduct money manager searches online and it recently acquired the Altvest online database of hedge fund managers. Its service includes analytical tools and performance data. In March, it formed an alliance with Measurisk to provide risk information on the funds.
“The partnership between InvestorForce and Measurisk gives hedge fund investors the same transparency that institutional investors and consultants are accustomed to in the traditional investment marketplace,” says Jim Morrissey, president and chief executive officer of InvestorForce.
With even some of the most conservative investors now looking at alternative investment vehicles, the clamour for information on them is likely to prompt the creation of more online databases and risk and performance services in the future.
Clive Davidson is a freelance journalist
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