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Staying in tune

Date: Thursday, April 5, 2012
Author: Will Wainewright, HFMWeek

Growing support for Opera, the risk transparency initiative, could indicate that the hedge fund industry’s traditionally autonomous members are becoming increasingly willing to collaborate. Could it be a sign of things to come?

In its opening two words, Open Protocol Enabling Risk Aggregation – or Opera, the industry-wide reporting initiative launched by investment consultant Albourne Partners last year – shows why some think such standards may not be a natural fit for the hedge fund sector. The idea of openness runs contrary to the tendency among funds to keep trading and operational details secret, while protocols suggests a shared approach, which seems to conflict with the ‘alternative’ nature of the industry, where doing things differently is the norm.

But industry support for Opera, which emerged after 2008 as investors demanded more transparency on hedge fund risk, is increasing nonetheless. Gaurav Amin of Albourne Partners, who designed and is now overseeing the project, says that 130 managers have either built the Opera standards into their systems already or are currently doing so, while more and more fund administrators are showing an interest. The project, which aims to set industry-wide ‘consistent practices’ for risk reporting, making risk data more accessible and easier to digest for the end-investor, is gathering pace.

The decision to embrace the standards was an easy one for Arrowgrass, a $4bn London-based fund, according to CEO Henry Kenner. “Accountability and transparency is the way forward for the entire industry. We had focused on providing detailed risk reports for investors for a while, so Opera was a natural next step for us,” he says. Arrowgrass has now reached the third, and most detailed, Opera reporting level, and Kenner adds that it has been received well by investors, particularly those in the US who were not used to such a “granular level” of detail.

But how likely is it that an industry as diverse and individually minded as the hedge fund sector will unite behind one common set of standards? Citco Fund Services, the industry’s largest administrator in asset terms, launched the Citco Transparency Platform (CTP) in 2008 but has subsequently emerged as a key supporter of Albourne’s initiative. “Common standards across the industry make it easier for investors to aggregate data, and they are ultimately the key players in all this,” says managing director Oliver Scully. However, he thinks it unlikely that any one set of standards will be adopted by everyone.

“It is called the alternatives industry for a reason, and no one size fits all” he adds. “Risk reports are data hungry, and there are many different ways of aggregating data. The Opera standards are powerful in that they set a uniform way of doing things which aims to be as user-friendly for the data aggregator as possible. But it won’t be possible for all to comply, and many investors already have their own bespoke solutions in place.”

Conflicting attitudes and priorities among different parts of the industry could be an obstacle to such common initiatives, Opera included. Many funds of hedge funds (FoHF) have had their own systems for reporting risk from underlying funds for a while and some feel consternation that Albourne Partners – as an investment consultant, not a natural ally – has entered the fray to take ownership of the issue.

The next question Opera faces may concern independence. Many administrators do not possess the risk systems needed to provide the level of risk reporting required by the standards and some funds that offer Level Three compliance do so in-house, as administrators are not capable of providing the reports. Whether or not investors will be satisfied with this, given the trend in recent years towards having an external administrator, remains to be seen.

That said, growing support for Opera suggests that the industry is keener than before to embrace common enterprises. The rude health of the Hedge Fund Standards Board, which has won increased industry backing during the last year, is a further sign. As a concept, “open protocols” may be a step too far for some, but it is fair to say that the industry seems to be opening up.


On song: Opera standards and regulation

Not many aspects of the hedge fund industry were left untouched by the events of 2008, and transparency is no exception. Since the crisis, investors have focused on risk and operational transparency with a vigour not present before, a shift intensified by their increasingly institutional profile. The Opera initiative is a direct consequence of this drive by investors to have more risk data at their disposal.

The high volumes of regulation to affect the industry since 2008 is related to this drive for transparency, but is not its cause; after all, regulatory concerns are not the primary driver for Albourne Partners, Opera’s creator. There are synergies between the reporting required under Opera and that required by some items of legislation, although one source told HFMWeek that the initiative should focus on providing more common reference points in the future, citing Form PF as an example.