Risk Aggregation Standard Launched08.19.2011
Faced with mounting regulatory and investor pressures, the hedge fund industry is developing standards for how funds collect, collate, and convey risk information.
A new protocol, Open Protocol Enabling Risk Aggregation (OPERA), will help hedge fund investors to aggregate exposures, and reduce proliferation of investor-specific risk formats that hedge funds have to manage.
“The Open Protocol is more for hedge fund investors than hedge funds themselves,” Gerard Buggy, global head of hedge fund markets at Thomson Reuters, told Markets Media. “Hedge funds will continue to report to investors in the way they always have done, but they will be able to use the Open Protocol in conjunction with what they already report. From an investor perspective it makes reports standardized and provides more context.”
Developed by an independent working group of 16 firms, including investors, prime brokers, fund administrators and hedge funds, OPERA is designed to increase the level of transparency available to investors, which varies from fund to fund and from strategy to strategy.
The main functions of OPERA are to define and maintain the protocols, grades and templates that will ensure that risk and performance information from the alternative investment industry will be consistently calculated, summarized and conveyed.
“The Open Protocol is a reporting language that hedge funds can use to report and facilitate the transfer of information,” said Buggy. “The ownership of the information is always with the hedge fund manager.”
Hedge funds and investors have a common set of threads, such as risk monitoring, risk comparison and risk aggregation, and by using an open protocol, output can be compared on a like for like basis, Buggy said. “Different funds have different tolerances to transparency and the Open Protocol makes sure that investors can aggregate information with accuracy and flexibility,” he said.
The European Securities and Markets Authority (ESMA), the pan-European securities regulator, has released a new consultation on possible implementing measures for the Alternative Investment Fund Managers Directive.
“The hedge fund space is not currently dictated by any stringent regulatory requirements; however the Open Protocol answers a lot of the questions that have arisen from the ESMA consultation and is in line with expectations for investors, regulators and industry bodies,” said Buggy.
The financial crisis highlighted that hedge fund capital was not stable, and therefore hedge funds have looked to increase their exposure to institutional investment. The fact that reports can be aggregated and compared will increase the attraction of funds to investors, and aid in the capital raising process.
“The work that industry bodies and regulators are doing around transparency and disclosure to investors is moving towards a supporting technical language that lies behind the systematic data reporting requirements and the Open Protocol provides this,” Buggy said.
The working group behind the Open Protocol is formed of a team based on banks and IT providers that are already involved in the ever-evolving system of financial protocols as well as major hedge funds, their investors, prime brokers and administrators whose overall drive is to increasing the quality and quantity of capital in the hedge fund space, he said.