Institutional Investors Must Expand Risk Capabilities to Cope with Alternative Investments

Date: Friday, December 7, 2012
Author: Nigel Someck, ProHedge.co.uk

The by-product of Institutional Investors allocating increasingly more capital to alternative investments is that they take on more non-linear risk and as a result, existing tools and definitions for risk may become antiquated.

Furthermore, the challenge becomes more complex as investors aggregate risk across multiple strategies, asset classes and regions. Speaking to FINalternatives this week, Tyler Kim of Maples Fund Services highlights four areas for improvement that investors and their fiduciary advisers must improve on.

Transparency is important as investors must seek granular position level information from their fund managers in order to correctly measure risk. The challenge of being overwhelmed by masses of data exists and it is the responsibility of the investor to implement an efficient process to source only the most necessary data.

Customized risk definitions will allow investors to calculate risk across a range of sophisticated strategies and run scenario analyses on these portfolios.

Risk dialogue and an open path of communication between hedge funds and their investors means that they can share best practice in risk management, provide efficient transparency and be alert to any tail risk.

Continual adaptation, means that as strategies and the risk appetite of investors evolve, so must the tools they use to calculate risk. An investor can never be satisfied with the status quo and must continually search for best practice in risk management.