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Risk Aggregation: Myths and Realities

Date: Friday, September 28, 2012
Author: Nigel Someck, ProHedge

Risk aggregation has become a widely debated topic within the asset management industry in recent times. Everybody seems to have different view of what Risk Aggregation constitutes. Is it the sum of a range of asset classes distributed across a number of invested funds? Or is it funnelling disparate data into a common framework and summarizing the results? Investor Analytics (IA), a provider of Risk Aggregation services for more than a decade have compiled a white paper outlining best practice in risk aggregation.

The white paper clearly defines the process behind risk aggregation and who is involved. Risk aggregation is a process that involves 3 parties: The investor, the manager and the aggregator. Between the 3 parties they must collect data, agree legals such as NDAs, aggregate data into meaningful categories, develop a calculation framework, reporting tool and more.

Risk aggregation is in the spotlight following the financial crisis and new regulations that surfaced as a result. Form PF now requires hedge funds to reveal much more about their risk exposures than ever before, whilst OPERA (Open Protocol Enabling Risk Aggregation) is making it easier for investors to collect data.

These changes in regulatory standard have empowered investors and IA believe that investors should not be cautious when asking for transparency, even if it is to reveal position level information.

There is still a solution if that magic 100% transparency is not possible however. IA will actually factor in things like exposure buckets and returns based data on position level to complete the risk aggregation process.

In conclusion, IA produce a “survival guide” for risk aggregation, which forms a checklist for any investor looking to ramp up their internal analysis of invested funds. Key tips include:

- Involve the manager: they can spot their own errors faster than anyone else.

- Don’t lose site of the bigger picture: we should always strive for perfection, but sometime “approximately right” is better than “perfectly wrong”.

- Experience counts: risk aggregation has progressed since the financial crisis, utilise the best technology and services out there.

The full white paper is available on request by contacting info@investoranalytics.com or downloaded from www.investoranalytics.com.