New Study: Hedge Funds Strengthening Risk Management Practices

Daily or weekly investor reporting expected to nearly double in five years; More than 90% of hedge funds rely on third-party administrators for risk management support

WASHINGTON--(BUSINESS WIRE)--A new study from the Managed Funds Association (MFA), BNY Mellon, and HedgeMark outlines new data showing that hedge funds are continuing to develop risk management practices that fit the needs of investors and fund managers alike.

“Risk has always been central to the investment process, but we are definitely seeing an increased focus on risk from both hedge fund managers and investors”

The study, entitled “Risk Roadmap: Hedge Funds and Investors’ Evolving Approach to Risk,” uses qualitative and quantitative data collected from the Chief Risk Officers (CROs) of leading global hedge funds, institutional investors, prime brokers, and other industry participants. The data demonstrates the industry’s increasing focus on risk management and transparency. According to survey results, hedge funds project that five years from now 41% of investor reporting will be published daily or weekly, up from 22% today and just 12% in 2007.

“Today’s hedge funds are operating in a dramatically different environment than five or ten years ago, dedicating more resources to risk management and communicating more frequently with investors,” said Richard Baker, President and CEO of the Managed Funds Association. “Improvements to internal governance, independent transparency, quality and frequency of reporting can go a long way to strengthen the partnership between investors and fund managers. As the industry continues to evolve, we will see even more attention given to risk management, helping managers and allocators work together to navigate global markets.”

“Investors are increasingly taking a ‘trust and verify’ approach to a hedge fund’s reported risks and exposures. As a result, hedge fund managers have augmented their reliance on independent, third-party administrators and will continue to do so,” said Orla Nallen, Managing Director of Alternative Investment Services at BNY Mellon. “More fund managers are turning to third-party administrators not only for operational risk mitigation and transparency support, but also for services that help them expand into new markets and satisfy regional regulatory reporting, such as UCITS exposure and Form PF.”

“Risk has always been central to the investment process, but we are definitely seeing an increased focus on risk from both hedge fund managers and investors,” added Andrew Lapkin, President of HedgeMark. “For managers, it’s about protecting against unexpected losses and ensuring that the risks being taken are properly rewarded. Investors are particularly focused on many of the non-market risks including fraud, counter-party, liquidity and reputational risk – concerns that have been at the forefront of investors’ move to managed account solutions, only now we are seeing a greater focus on solutions provided by the highest rated providers and fund administrators.”

As new international regulations, including Basel III, the Dodd-Frank Act, and the European Market Infrastructure Regulation bring about significant changes to risk management practices, the study demonstrates that hedge funds today are “increasingly more willing to tell their story in plain language with a keen focus on sharing and explaining their risk approach.” Hedge funds are dedicating more resources to risk management and working to ensure the independence of risk managers, which is a best practice sought by institutional investors. More than 91% of hedge funds surveyed rely on a third party administrator in some risk management capacity.

Other significant findings included:

• 79% of firms now separate their risk manager and fund manager functions entirely to ensure independent oversight.
• Firms manage liquidity risk most explicitly – 55% treated liquidity risk with the highest importance.
• 60% of the larger hedge fund managers now have a dedicated risk management function.
• 84% of hedge funds use off-the-shelf risk analytics in their portfolio management or trading systems.

The study also identified 14 different types of risk that confront hedge fund managers and investors. These range from the liquidity, volatility and credit risks faced by most funds to such concerns as currency, commodity, and “meta” risk – the latter of which captures all the qualitative risks that can’t be easily measured, such as human and organizational behavior, or moral hazard.

Read the full report: https://www.managedfunds.org/industry-resources/industry-research/risk-roadmap-hedge-funds-and-investors-evolving-approach-to-risk/

About Managed Funds Association

The Managed Funds Association (MFA) represents the global alternative investment industry and its investors by advocating for sound industry practices and public policies that foster efficient, transparent, and fair capital markets. MFA, based in Washington, DC, is an advocacy, education, and communications organization established to enable hedge fund and managed futures firms in the alternative investment industry to participate in public policy discourse, share best practices and learn from peers, and communicate the industry’s contributions to the global economy. MFA members help pension plans, university endowments, charitable organizations, qualified individuals and other institutional investors to diversify their investments, manage risk, and generate attractive returns. MFA has cultivated a global membership and actively engages with regulators and policy makers in Asia, Europe, North and South America, and all other regions where MFA members are market participants.

For more information, please visit: www.managedfunds.org or follow us on Twitter @MFAUpdates.

About BNY Mellon

BNY Mellon is a leading administrator of alternative assets, including single manager hedge funds, funds of hedge funds, and private equity, with more than $525 billion of alternative assets under administration and custody and an extensive global presence. BNY Mellon also offers a wide range of cash management, foreign exchange, collateral management, corporate trust, and wealth management services to the alternative investment industry. Learn more at www.bnymellon.com or follow us on Twitter @BNYMellon.

About HedgeMark International. LLC

HedgeMark is an independent hedge fund managed account and risk monitoring platform and an affiliate of BNY Mellon. The platform features a broad range of investment strategies managed by many of the industry’s leading hedge fund managers. The funds management program is supported by a fully-integrated suite of risk and performance analytics, which include portfolio construction, back-testing, stress testing, and scenario modeling tools. Analytics are based on daily, position-based reporting that enables our clients to analyze sources of portfolio risk and performance on an aggregate level. Through the HedgeMark platform, users can build, analyze, and monitor their investments while using a proprietary surveillance engine to ensure that investments are managed in accordance with written guidelines and objectives.