Friday, October 4, 2013

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 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.

Monday, June 17, 2013

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

Tuesday, June 4, 2013

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

Thursday, April 18, 2013

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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Wednesday, April 10, 2013

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 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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Thursday, April 4, 2013

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 RĂªve”  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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Wednesday, March 27, 2013

Preparing for Generation D

They are 75 million strong.  They hold nearly $27 trillion in assets.  When it comes to investing, they are active, with higher levels of income.  And they’re usually well-educated.  Accenture calls them “Generation D,” because what sets this group apart is their “deeply digital lifestyle.”

Theirs is a demographic based on behavior, not by age.  Accenture stumbled upon Generation D last summer while conducting a survey of current and future investors.  The group is a hybrid, made up of “Skeptical Millennials,” “Jaded Gen-Xers,” and “Trusting Boomers.”  The common thread is that “Gen D members typically use multiple devices in a given week to manage financial accounts, look up investment information, and pay bills.”  They use social media, and they do their own investment due diligence on the Internet.  Accenture says Generation D is a “vitally important group of investors.”

That’s the good news.  The bad news is the conclusion of another Accenture survey conducted at the same time – financial advisers aren’t reaching these investors.  They need to remedy this neglect by using online educational tools and resources to connect with Gen D, and integrate social media into their overall communications strategy.

But how important really is social media to building a financial advisory practice?  Just ask Chris Hughes, one of the co-founders of Facebook.  Hughes was the one who designed Barack Obama’s digital strategy for his first election campaign.  Obama’s use of social networking, podcasting, and mobile messaging helped win him the White House.

One of the worst casualties of the financial crisis was the erosion of trust between investors and their financial advisors.  Engaging Generation D on digital platforms is a golden opportunity for advisors to repair the rift, and reap the rewards.
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Tuesday, March 19, 2013

Is Regulation Keeping You Up At Night?

News outlets have been filled with articles on the settlement that hedge fund legend Steve Cohen recently reached with the SEC. The settlement which has been called historic by the likes of USA Today is just another example of the regulators push to go after “the bad guys” in wake of the Madoff fraud back in 2008.

Has Wall Street or better yet the hedge fund industry fallen off a cliff or is this just another example of things to come in this area of the capital markets?

It is clear that going after bad guys is something the SEC is focused on. There has not been a lack of headlines about funds that have done wrong by the markets.

Be that as it may, the irony is that the media never tries to find the “inside information” of what Hedge Funds have to do to comply with SEC guidelines. 

The hedge fund industry is constantly evolving both onshore and off, working to create and implement better systems, policies and procedures to comply with the ever changing regulation landscape. A recently published study by Credit Suisse found that hedge fund investors believe that constant regulatory constraints is one of the biggest threats to the industry.

In summary, the Hedge Fund industry is clearly listening to both the regulators and the investors but implementation and adoption of policies and procedures takes time. The question is… will it be fast enough for the regulators?

-The IIR Alternatives Team
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Friday, March 15, 2013

Is now the time to invest in Africa?

Africa seems to be the new darling of the emerging market managers who are looking for higher returns for their investment portfolio.

The demographics sound impressive:
  • Africa's population has rapidly increased over the last 40 years, and consequently, it is relatively young. In some African states, half or more of the population is under 25 years of age.
  • According to McKinsey & Associates, household consumption in Africa is now higher than India or Russia and is expected to continue to grow.
  • Africa is vast- 54 countries and 29 stock exchanges and different regions present different opportunities.
Original Photo:

 European investors have been investing in Africa with much success over the last decade and now it seems that US pensions, endowments and foundations are starting to pay attention as well. There are many ways to access this market including private equity, publicly traded stocks, as well as direct plays in natural resources and infrastructure. However, investing in Africa is not for the faint of heart. The news headlines are filled with negative stories about violence and political instability. Here are some recent articles about this opportunity:

Africa: the final investment frontier? March 4, 2013

Is Investing in Africa a good bet? January 24, 2013

Follow the Fixer February 22, 2013

Africa Ripe for Investment December 5, 2012

We are currently researching the African market. Please let us know your thoughts by emailing us at

-The IIR Alternatives Team
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Wednesday, February 27, 2013

What Will Distinguish Top Asset Managers in 2013? Innovation, Researchers Say

As defined contribution plans continue “the quest for new innovative products” in the alternatives space, money managers are going to have to notch up their product creativity.  Pension plan managers are looking for managers with unbundled fund options and customized target-date funds that offer multiple manager inputs. This search trend has created some challenges for large money managers as their smaller competitors have been able to adapt quickly to the needs of the DC plan market.

Pension Plans are also seeking more options in real assets, real estate, and private equity, and customized target-date funds provided by nimble small managers are allowing plans the flexibility they need for these allocations. This is good news for smaller managers, as asset owners are “basically asking for investment strategies traditionally managed by smaller managers,” said Ben Olmstead of eVestment LLC.

So what; is a large asset manager to do? According to research from Casey, Quirk & Associates and Cogent Research LLC, large managers could create replication strategies, refocus on product development and differentiation, and “recognize the shift” away from traditional equity and fixed income. While the largest managers are still growing assets, the managers that find a way to focus on asset classes and build expertise or differentiation have a chance to stay in the game, said Gary Shub of Boston Consulting Group.

Another arena larger managers are competing with their smaller peers is in emerging markets, where equity and debt saw more than $50 billion in inflows last year. However, while “it’s not too late to get in (to emerging markets),” Benjamin Phillips of Casey, Quirk & Associates said, managers will “need a highly differentiated product” to find any opportunity.

The Road Less Traveled

Here are some recent articles from Pension and Investments we found that illustrate plan sponsors’ search for innovation:

Demand for innovation threatens biggest firm
(Pensions & Investments, Kevin Olsen, February 18th , 2013)

Pension funds are unlikely to be part of any big equity push
(Pensions & Investments, Thao Hua, February 4th, 2013)

To share your thoughts about what you are seeing in the pension industry please get in touch with Francoise Van Keuren via email:

-The IIR Alternatives Team
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Wednesday, February 20, 2013

Which Crop is the Next to Pop?

Agriculture can be contradictory asset class, with investors often viewing the opportunities as both over-heated and under-invested. But throughout our research with investors and managers alike, all signs points to permanent crops as the next segment to pop. 

Many investors lump long-time favorite timber into the permanent crop category – and there are some relative newcomers like palm oil and perennial energy crops that are also getting attention. But more frequently, we’re hearing that the more niche permanent crops are the ones to watch. Investors love these “boutique” items, such as avocados, almonds and pistachios because they, often command higher prices resulting in higher margins. There’s even a shift within individual commodities – with the more profitable and easy-to-peel Clementine orange gaining traction over the more cumbersome Valencia version. And with last summer’s drought still fresh on the mind of many investors, permanent crops are often viewed as a more palatable investment amid environmental instability. 

Of course, there are risks. While permanent crops may be a better buy amid weather volatility, they are subject to market volatility and the whims of consumer demand. And while Asian countries are among the biggest purchasers of U.S. permanent crops, there’s some anxiety that China will become a hefty competitor in some categories in the not so distance future.

Currently row crops still dominate, accounting for roughly 70% of most Ag Investors portfolios but with permanent crops showing so much promise we expect allocations to increase.

How do permanent crops factor into your agriculture investment strategy? Tell us and get involved with the AgReturn conference series. Contact Conference Producer Diana Middleton,, for more details.

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Wednesday, February 13, 2013

The State of the Union… Now what?

Last night the President gave his annual State of the Union address laying out his plans for the economic future of the United States of America.  The main idea was more jobs. However you personally felt about the speech, we thought you would enjoy hearing what both sides of the aisle thought about Mr. Obama’s State of the Union. Below are links to some commentary on the speech for you to enjoy.

Chicago Tribune: State of the Union: Obama to GOP: Can we just move on?

The Washington Post: President Obama’s 2013 State of the Union by the numbers

USA Today:  Readers describe state of the union in a word: 'Screwed'

Forbes: 2013 State of the Union Recap

The IIR Alternatives Team is currently gearing up for GAIM Ops Cayman and our Investor Ops program held in April and June respectively. While the markets continue to experience significant volatility and uncertainty, one thing is certain, due diligence and strong operations have never been more important. Both events focus on these topics and we invite you to check out the programs by clicking here for GAIM Ops Cayman and here for Investor Ops. 

In addition to these exciting events our June calendar also includes our Private Placement Life Insurance event and our Direct and Alternative Investing Forum for Family Offices. If you need additional information or have any questions please get in touch with us.

-    The IIR Alternatives Team

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Monday, February 4, 2013

The Changing Face of the SEC

As Mary Jo White assumes the helm at the Securities and Exchange Commission, speculation as to whether anything or everything will change continues to fuel the regulatory flames.    Ben Protess and Benjamin Weiser of DealBook said that the appointment, in conjunction with other new nominations, demonstrated the President’s “resolve to hold Wall Street accountable for wrongdoing, extolling his candidates’ records as prosecutors.”    As noted in the WSJ, the nomination of Mary Jo White marks the first time a former prosecutor has been chosen to lead the Securities and Exchange Commission.   But, one must ask, is White’s prosecutorial background a preposterously delayed reaction to egregious infractions committed by members of the finance industry prior to 2008 or is it the beginning of a new, progressive, forward-thinking SEC?  

Comments made by Pippa Malmgren and former SEC Commissioner David Kotz at the recent GAIM USA event are worth considering when evaluating the changing SEC.   As Glen Florio summarized on OpenGamma, “Malmgren …raised the philosophical question of whether government can protect people from a loss in the first place. … we have a ‘bad guy’ that is publicly pulled off the stage, the public desire to feel the swamp is clear of the sharks is not yet fed. We will therefore continue to see a more aggressive regulatory approach.”  And regarding hedge funds in particular, Kotz acknowledged “the overall cost of all the disclosures is considerable, and they have little value. In many cases, documents are collected and just filed away. The SEC doesn’t have the resources to do much with them, so in many ways it can be seen as a waste of money.”

New leadership is always promising but without the proper resources, can we really anticipate change?

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Thursday, January 31, 2013

Hedge Funds Play Catch-Up

Our annual GAIM conference last week in Boca Raton yielded a wealth of investment insights and industry information for our attendees.  But if we had to pick one macro trend for the coming year, none may be more important than this one: more and more managers are favoring equities – in particular, U.S. equities – over fixed-income.  That’s a new twist in the world of hedge funds.  Earlier this month, Hedge Fund Research announced that the fixed income-based “Relative Value Arbitrage” strategy at the end of last year overtook “Equity Hedge” as the largest strategy area by assets.  But it may be no coincidence that, while hedge funds’ love affair with all things debt-related was peaking, the S&P 500 Index was beginning an 11-percent rally from the middle of November through last Friday.  Now, hedge fund investors certainly have plenty to grumble about – nearly 9 out of every 10 hedge funds lagged the S&P 500 last year, and the S&P’s 2012 return dwarfed that of the average fund.  But those funds that did bet big on U.S. equities were rewarded.   For one, Patrick Wolff’s Grandmaster Capital Management gained 22 percent last year.  Is there still life in this bull market for stocks?  “Now you have P/E’s that are very reasonable, and you have rock-bottom interest rates,” Wolff told Reuters TV at the GAIM event.  “So interest rates can come back up by a few hundred basis points, and stocks still look attractively valued.”  Large-cap U.S. stocks in particular look good, according to Wolff and others at the conference.  You heard it here first.

Link to Reuters story about GAIM attendees touting U.S. equities:

Link to Reuters TV interview with Patrick Wolff:

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