Staying in tune

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.