Hedge Fund Risk Management on the Rise

Date: Friday, January 11, 2013
Author: Kavi Unadkat, ProHedge.co.uk

The importance of risk management in the hedge fund industry is growing rapidly, and with it, the demand for dedicated risk analytics systems. 

The necessity for greater risk management today is being driven by a change in investment styles. In the past the buy-side used to invest in a single asset class – usually equities – greater investment in multi-asset strategies such as real estate, hedge funds, distressed debt and CLOs, have increased the pressure to monitor risk more stringently.

Debbie Williams of R² Financial Technologies, part of S&P Capital IQ, who provide multi-asset class portfolio and risk analytics, says: “We are not going to go backwards where you can succeed as an institutional asset manager just by picking your favourite security or bond and holding it. Risk tools will have to catch up.”

The need for greater transparency by investors has also had a knock-on effect on hedge funds as they bulk up their risk management capabilities. Today, hedge funds will publicize their focus on risk as a marketing tool. “There has been a big demand for more externally oriented reporting”, added Williams, “if your money is coming from relatively sophisticated investors, the other way to differentiate will be risk efficiency”.

Williams believes the next big investment trend will be towards securitization, and with it, more due diligence to be conducted by investors on these transparent structures using risk analytics tools.

Given the growing requirement for risk reporting and transparency from investors, and  regulators, the risk analytics space will likely continue to expand.