Asset Managers Leverage Risk Tools
Traditional techniques fail to capture Black Swan events.
Risk management has experienced a groundswell of interest given the increase in Black Swan-type events over the past several years. That has heightened awareness of the need for robust risk systems that can model every conceivable scenario.
“Over the past decade, there’s been a recognition that traditional risk management tools weren’t capturing the volatility of the markets,” James Ramenda, senior vice president of enterprise risk at SS&C Technologies, told Markets Media.
The trend came into sharp focus with the 2007-09 financial crisis, when markets became correlated in a downward direction, and has picked up again recently with events in Europe and MF Global.
“There is still an abundance of what were thought to be unusual events happening in clusters,” said Ramenda. “The interest in risk management has heightened with the European sovereign debt crisis.”
In response, regulators have upped the ante on reporting of risk information by private investment funds.
Registered investment advisers to hedge funds and other private investment pools face data management challenges in complying with a new reporting rule adopted by the SEC.
The rule requires that SEC-registered investment advisers report systemic risk information on a new Form PF if they advise one or more private funds.
Form PF will elicit nonpublic information about private funds and their trading strategies, the public disclosure of which, in many cases, could adversely affect the funds and their investors.
Among the tasks facing advisers in meeting Form PF requirement are organizing normalized data in one database from portfolio accounting, counterparties, and risk systems; a “calculation layer” on top of the normalized data for reporting purposes; and flexible workflow capability to meet the needs of a simple to a complex illiquid fund.
SS&C’s newly-launched Global Markets Risk solution provides independent risk analysis and reporting for asset managers, hedge funds, insurance companies, banks and pension funds. “It will enable fund managers to aggregate risks in a way that incorporates the most advanced simulation techniques,” Ramenda said. “It provides the basis for meeting regulatory requirements, including Form PF.”
Global Markets Risk simulates investment returns for all asset classes, and calculates a complete range of risk measures that can be viewed at the aggregate portfolio level or segmented in any number of ways, the company said.
At its core is a unique stochastic model which employs three statistical processes to analyze historical correlations among time series data and then simulate scenarios that fully reflect the complexity of these relationships.
“The underlying strength of Global Markets Risk is its ability to make realistic short- and long-term future projections of economic and market variables in order to price assets of all types,” said Ramenda. “The result is a rich set of decision-making information for investment managers.”
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