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Top Considerations for Risk Managing Hedge Funds
By Nik Venema | July 29, 2015

On July 8, FINCAD attended the Hedge Fund Startup Forum in Hong Kong at the Excelsior. The purpose of the event was to provide individuals looking to start a hedge fund with an in-depth guide for setting up a fund and gaining investment. Tony Webb, PhD, Director of Analytics at FINCAD gave a presentation geared to helping hedge funds understand how to select the right portfolio and risk management solution for their needs.

Tony explored some of the challenges plaguing today’s hedge fund managers, including operating in a landscape of increasing complexity. Firms are required to perform more complex calculations than ever and are simultaneously dealing with escalating computing resource requirements.

Tony went on to describe that the traditional method derivatives firms use for risk management, “bump and grind” is by nature slow. As a result, risk management often happens on a daily basis –not intra-day or even pre-trade. Then typically, to fit risk measurement within a nightly run, firms will cut down on their number of calculations by shifting entire curves together, or applying twists and other aggregate bumps. But these tactics are not enough to solve the problem. So, often they look to apply additional hardware, which introduces further complexity. 

A better solution for optimizing risk management is to use adjoint algorithmic differentiation (AAD). An increasing number of top-performing firms are realizing the role AAD can have in speeding up the resolution of complex risk and analytics problems. As such, traders looking to start a hedge fund can dramatically benefit from risk architecture that facilitates AAD. 

In fact, Tony explained that fast calculation of risk is one of the five core elements that hedge fund managers need in a risk management solution:

  1. Speed: This includes timely access to analytics that can enable hedge fund managers to understand their risk on an intraday and pre-trade basis.  
  2. Accuracy: Bumping is approximate. However, solutions that leverage AAD allow you to understand your exact sensitivities, enabling more efficient use of capital. 
  3. Flexibility: In order to capitalize on new investment opportunities, hedge funds need access to a risk platform that enables customizable curve building and broad multi-currency, multi-asset class coverage.  
  4. Transparency: Increasingly investors are demanding greater transparency from their financial institutions. As a consequence, firms should look to adopt an analytics platform that offers full documentation for all models and an audit trail for all model changes. 
  5. Holistic: To be successful, hedge fund managers need a holistic view of risk across the enterprise. Therefore, high performances risk architecture that facilitates consistent modeling and accurate valuation and risk across portfolios is key. 

FINCAD’S F3 embodies these five pillars, including its sophisticated implementation of AAD known as Universal Algorithmic Differentiation™ (UAD), which helps firms to turn risk management into a competitive advantage. 

Near the end of his presentation, Tony offered a case study highlighting a large UK hedge fund that is successfully utilizing F3 for managing investments. “Risk and valuation output is so powerful that once implemented, we got a shopping list of calculations we could run with an abundance of analytics information available,” stated a representative from the firm. 

For a more in-depth look at the pillars listed above, see our related white paper, Creating Competitive Advantage with Risk Management: The Five Pillars.