3 Can't Miss Moments at GAIM Ops Cayman

In case you need more reasons to attend the Operations, Compliance and Due Diligence event of the year, here are three:

1.    Meet peers, forge new business and connect with the thought leaders at these networking events:

• April 6th, 5th Annual Charity Night Reception - all net proceeds go to R Baby Foundation, Michael's Mission, Hedge Funds Care Cayman
• April 7th , Cocktails and Conversations Tables 
• April 9th, Beach Party

Click here for more details about the networking events

2.    If you are an institutional investor, acquire pertinent information from the thought leaders in the business on:

• Evaluating, Managing and Identifying Outsourced Staff and Service Providers
• Operational Alpha
• ODD: Different Approaches for Different Asset Classes
• Investor Rights: Looking for More Security

Click here for the full Institutional Investor Pre-conference Agenda

3.    All attendees receive complimentary access to the soft skills workshops held by best in class training professionals:

• Human Capital Assessment: Tips for effectively conducting talent due-diligence
• Lie Detection: Key techniques on how to better detect deception
• Negotiation Training: How to negotiate when you lack leverage
• Media Training: How to stay in control of the interview

Click here for the full Soft Skills Workshop Agenda
 

I look forward to seeing you April 6-9 at the Ritz-Carlton in Grand Cayman - Register now!

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Q&A with Christian Szylar, Global Head of Risk and Performance Measurement at Marshall Wace LLP

GAIM Ops International speaker Christian Szylar, Global Head of Risk and Performance Measurement at Marshall Wace LLP, to discuss how risk management activities for alternative asset managers have changed since the 2008-2009 financial crises.

What kinds of questions do your investors ask you most often?
I assume that your question refers to questions I’m asked in my capacity of managing the risk department. Investors mainly during the due diligence process want first to make sure about proper risk governance in the firm, and have a sense of comfort that proper risk management systems are in place to understand what the main risk drivers are for any portfolio. They are particularly interested in the changes we have implemented in the way we monitor risk since the financial crisis, and how lessons have been translated into better risk practices. I spend a lot of time explaining how our risk management differs slightly compared to four years ago, without saying that what was done then was not strong enough. I end up talking about how a new paradigm has emerged after the 2008 financial crisis. Most investors want to know what particular risk factor (in our case, using a fundamental equity risk model) drives the risk in the portfolio in which they have invested. They are also focusing on performance risk-adjusted metrics, such as the information ratio for persistence of alpha and the Sharpe ratio – though these two metrics are by no means exhaustive. Understanding drivers of risk, drivers of alpha/return are the key focal points among investors. During times of uncertainty and stress, investors are also curious about downside risk, the drawdown situation (if any), and the gross management with regards to the predicted volatility. Investors’ focus on any drawdown management has increased since the financial crisis. 

How have risk management duties for alternative asset managers changed under the AIFMD? When I look at the requirements of AIFMD for risk management I can’t imagine that these requirements can constitute a huge challenge for any respectable and professional investment firm. Actually, I think that even having to say that a manager should have a sound and reliable risk management system is an obvious requirement. Would you not expect, as any investor would, that firms to whom you give your money should be able to manage the inherent risk which goes with asset management duties? For a firm like Marshall Wace, we did not wait for AIFMD to discover the obvious. Investing and Risk Management are in the end two faces of the same coin. So for most alternative managers I do not expect a lot of problems to deal and cope with the AIFM requirements in terms of risk management. One of the benefits of the AIFMD is that it clarifies what qualifies as “leverage.” This topic was not really formalized for the hedge fund industry until now. It was for UCITS funds but not for alternative managers. Liquidity management is also something firms are already focusing on – I imagine since 2008. So honestly I think the AIFMD requirements in terms of risk are just mentioning the obvious. 

How has Marshall Wace dealt with implementing the changes that the AIFMD demands? 
I will answer this question from a risk management perspective. As mentioned above, it won’t be a problem for us to cope with the risk requirement, considering the firm’s investment in risk management www.GAIMOpsInternational.com in terms of resources and technologies for many years now. We were already computing leverage using the UCITS methodology, so apart from fine-tuning the data, this was relatively easy to implement. 

JPMorgan’s huge trading losses last year could be traced back to the implementation of a new Value-at-Risk model that masked a mark-to-market loss totaling billions. Are all VaR models fundamentally flawed? Can risk managers “stress test” their VaR models to avoid a JPMorgan-like scenario? 
I won’t comment on the JP Morgan case as I do not have all the details. The only thing I can say is that after the 2008 collapse a lot of papers have said that VaR was useless. I can certainly understand this kind of reaction, but I found those criticisms not always 100% justified. Those working in risk management or being knowledgeable on this question know that the VaR is a probability-based model and in its parametric formulation it assumes a normal distribution of return. The VaR, by definition, has some flaws. This is not new information. The VaR is still an interesting concept in risk management. I think that what is to blame is most probably the over-reliance that some put on the VaR numbers. VaR is indicative and should be used with caution. Knowing the inherent limitation of the model, we may then develop better stress testing scenarios, extreme case scenarios, focusing on fat tails, back testing and risk model review on a regular basis. So we can reduce the limitation of the VaR, but we can’t eliminate all of them. 

Another aspect of course behind the appropriateness of the model is the valuation of assets. If assets are not properly valued, then it is totally unfair to criticize the VaR model. As we say: “garbage in – garbage out” and proper valuation is the first requirement. 

What are some of the new risk methodologies that are being used? 
There are a lot, and the following may not be exhaustive but essentially I try to focus on creating an holistic risk approach, tail risk management and extreme events, dynamical correlation analysis and shift in correlation regime, dynamic volatility adjustment, macro risks as macro influence on the market has been important during the last years, improving looking forward and enhanced predicted volatility, developing multivariate stress testing, not relying on one risk model but use of different models (PCA/Fundamentals with different time series, half-life, time horizon, et al) and see how they react in different volatility regimes, liquidity stress testing, etc. 

What are the biggest threats to a client’s investment these days? Rising interest rates? Slowing growth in emerging markets? High-frequency/algorithmic trading systems? 
Not an easy question. Since 2008 we do have unconventional monetary policy in the USA but also in the UK and in the Euro zone. But the focus now is on the US. The level of these unconventional monetary policies has had an impact on asset prices. We can see that the US economy shows some good sign of resilience but the main question is to know if the recovery is strong enough without the money coming from the Central Bank… So how investors will appreciate the consequences of QE tapering is indeed a risk as asset allocation may largely depend on this. Rising interest rates should be good for equities as rising interest rates happen when the economy is resilient enough. What will be interesting is the change of risk appetite between bonds and equities. What is happening currently in emerging markets following the US Fed decision to reduce QE is according to me the biggest risk currently.

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So You Want to be a Mutual Fund Manager

By: Stephen H. Bier, Aisha Hunt, and Jonathan R. Massey, Dechert LLP*

 

So you are an investment adviser registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended (“Advisers Act”). You currently manage separate accounts and, perhaps, one or more private funds, but you are interested in getting into the registered fund business. As an SEC registered adviser, you have already adopted compliance policies and procedures pursuant to Rule 206(4)-7 of the Advisers Act and you are certainly eligible to advise a registered investment company.1 So you’re good to go? . . . Not so fast.

To read the rest of this article visit the Alternative Strategy Mutual Funds Forum event website.

Aisha Hunt, Partner, Financial Services Group, Dechert LLP  is one of the Alternative Strategy Mutual Funds Forum esteemed speakers. 

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What TESLA’s Recent Success Means for America’s Manufacturing Comeback

With much fanfare, Tesla just announced its first quarterly profit: $11.2 million.  Why is this so significant?  Well, some core tenants of Tesla’s manufacturing process are gaining traction among manufacturers globally as they assess new opportunities in the U.S.


A lot has been written lately about America’s comeback as a manufacturing powerhouse.  While the degree to which this country will see a resurgence in manufacturing jobs is open for debate, one thing is for certain – cost efficiencies from natural gas exploration, increased labor costs abroad and new innovation in the US with regards to automation, 3D printing and many other technologies have all converged to fuel the perfect storm of opportunity.   But the how, when, and where of increasing production allocation to the US is complicated.   Tesla provides some answers.
 

• Tesla is located in the heart of innovation as one recent Christian Science Monitor article pointed out.  Being near new technologies that will  benefit the specific manufacturer’s production is critical.
• Tesla utilized abandoned auto plants for production.  Re-purposing America’s vast decaying resources from manufacturing’s bygone era is not only cost-efficient but allows companies to tap into sustainability initiatives.
• Tesla  is able to promote the  “Made in America” feature for brand strategy.   Manufacturers continue to evaluate and assess the customer’s willingness to pay for the “Made in America” brand, and while skeptics assert there is no such thing as a patriotic dollar, customers continue to prove that there is a demand for domestically produced products.  

It will be interesting to watch how many other manufacturers turn to Tesla’s model for inspiration and future planning.



- The IIR Alternatives Team

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6 Ways Hedge Funds Need to Adapt Now

The Sixth Annual Global Survey of Institutional Hedge Fund Investors + Insights from Industry Roundtables

The hedge fund industry is here to stay. Yet, the industry’s value proposition is being seriously questioned, and institutions continue to escalate their demands for transparency and intensify their due-diligence processes.  Some see the institutionalization of hedge funds as a double-edged trend that may hinder performance even as it brings more discipline and accountability to the industry.  No longer can managers simply “show and tell.”  Now investors want proof and need to judge for themselves.

To explore what directions the industry is taking now, and how hedge fund firms can better equip themselves to succeed, SEI & Minard Capital complemented a survey of institutional investors with wide-ranging roundtable discussions. The resulting study identifies several key challenges hedge fund firms must meet if they hope to succeed in the long term:

• Sustainable edge. Institutional investors are raising the bar for manager selection as “there are too many look-alike strategies in the industry,”

• Adaptability. Hedge fund managers need to rethink their business models and develop multi-faceted solutions that package their capabilities most effectively.   

• Clear value added. Investors are increasingly concerned with how much “true alpha” they are getting for the hedge fund fees they pay.

• The right fit. Today’s investors have complex needs and want hedge funds to serve multiple objectives within an overall portfolio mix. 

• Scale or sizzle. While large funds still attract the majority of institutional assets, small funds may be better equipped to offer competitive returns.  

• Business and marketing acumen.  Asset growth often depends more on effective marketing and sound business management than investment performance.

For further details on these challenges, visit SEI’s website to receive your copy of the white paper, “6 Ways Hedge Funds Need to Adapt Now.”


- SEI Knowledge Partnership

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Could a Virtual Currency be the Next ETF?

You may have heard a lot about Bitcoin in the past week. For one, the worth of the digital currency has skyrocketed, with values topping $250 today, up from $44 a month ago – and $4.93 a year ago. The staggering run-up has got the InAlternatives team excited – but there’s also talk of a potential bubble in the making, particularly in the wake of a “flash crash” last month that was eventually traced to a technological glitch in the Bitcoin exchange.

Of course, the mishap didn’t temper the appetite for the virtual currency, which is traded on a peer-to-peer network outside the control of central banks. This recent VF.com story on Bitcoin reiterates the old adage, the bigger the risk, the more lucrative the reward.

Despite its rock-n-roll beginnings, Bitcoin has claimed a legitimate spot at the table, thanks to global currencies on the verge of a valuation war, according to this story at ETF Trends.

The article poses an interesting question -- could Bitcoin be the backing currency of a ETF?  For now, it is unlikely. That is, until there are securities backed by Bitcoin – and the currency becomes regulated. Bitcoin doesn’t operate like other currencies, because it is in limited supply, making it more akin to a commodity. Bitcoins are also pretty hard to come by, with programmers releasing them at their own discretion.

So, you tell us: Have you ever used Bitcoin? What’s your take on the future of this virtual currency? Could Bitcoing be the backing currency for an ETF or another investment vehicle?

-    The IIR Alternatives team

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And the hits just keep on coming…

It is clear from all the news these last few weeks that insider trading indictments are not going away. The SEC has clearly targeted any and all who are suspected of doing this dirty deed. And if insider trading indictments aren’t bad enough, it seems now the press is focused on how hedge fund managers are spending their market winnings. 

Just as we all were settling to read about the recent indictments of SAC Capital Advisors LP personnel as well as additional indictments in the Galleon Group case, we got wind of a recent spending spree by SAC founder Steve Cohen. His purchase of a home in the Hamptons and Picasso’s “Le Rêve”  have made substantial headlines around world. For news junkies, these are the stories that keep on going.

It looks like insider trading indictments are going to remain high up on the SEC’s agenda for the time to come. As such investors and fund managers need to be prepared. Fund litigation and dispute resolution is something on the minds’ of all involved in the hedge fund industry these days.

At GAIM Ops Cayman, there will be sessions devoted to this topic and if you have not registered for this great event you can do so by clicking here . Separately, we are pleased to announce a New York-based Fund Governance and Litigation Summit in September. This new program is geared directly to managers, investors, and lawyers who want to know more about best practices in this area of the hedge fund industry.

In the meantime, settle in, the ride is far from over.

-    The IIR Alternatives team

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