Tom Groenfeldt - A $3.1 billion hedge fund that specializes in distressed debt needs good risk reporting for both regulators and clients.
“We also needed a better understanding of the data coming out of the risk systems and making sure the numbers made sense,” said the fund director, who asked not to be named. “We can use Riskmetrics, but for a variety of reasons we think the reports there are not as accurate as they could be because of flaw in the way data goes into the system. In our specific asset class, there are a variety of instruments which may be coded as high yield bonds, but behave differently because they are in restructuring or facing some event down the road. The normal analytics such as interest rate shocks or scenario analysis are not the right way to look at a particular instrument that might be event-driven.”
The fund manager didn’t want to hire two or three highly skilled risk analysts because it would cost too much and require specialized skills to manage an in-house team.
So he turned to Gravitas which combines risk management software with sophisticated risk analysts based in India.
“We asked Gravitas to help us cleanse the data and be thoughtful about what we are doing security by security, which is where they provide real value. With a long-short equity portfolio, you can run it through Riskmetrics, but with more arcane complicated instruments, you need something more. We needed a more thoughtful approach to risk than just taking what gets spit out of a computer.”
Gravitas has recently allied with IBM to offer IBM’s risk platform, formerly Algorithmics, to alternative investment clients.
“We were talking with Gravitas before the IBM announcement, but that partnership provides validation,” the fund manager added.
Gravitas risk analysts will use IBM’s risk technology to offer advanced analytics, modeling and custom reporting to help hedge funds meet regulatory requirements and support better investment decisions. Through Gravitas’s risk service, hedge funds can take advantage of IBM’s ability to model market, credit and liquidity risk on multiple asset types. They can create custom scenarios to assess the risk impact of market events and new trades across their portfolios with assistance from experienced Gravitas risk specialists in areas like credit.
Ahead of an investor meeting, the fund manager wanted to check his claims that his fund was in fact unique. He asked Gravitas to compare its holdings to the Markit CDX High Yield Index and was pleased to see coincidence was under two percent.
“I might have been able to do that internally, but we have a lot going on,” he explained. “Gravitas came back with a nice pie chart and a report.”
His investment aim is returns in the high single or low double digit range with very low volatility; the fund has an annualized return of “10 and change,” he said.
“We are trying to delivery low volatility, high quality risk-adjusted return for our investors. Pensions love that. They have liabilities and can’t be down 50 percent one year; they need a strategy that outperforms the bogey 7-8 percent. If they can beat that by 300-500 basis points they will love you all day. What they ask for is a fairly detailed portfolio attribution in profits and exposure on how you did that, did you generate 10 percent last year because two positions did well while you lost on all the others? That isn’t a profile they want to see. That is the kind of information they ask for, we can do some great metrics around that now.”
Gravitas helps him deliver the information that investors want.
He doesn’t use Gravitas for investment decisions — pre-trade risk — but he did use it to look at interest rates and runs stress scenarios which led the fund to put on some hedges around rates.
Jayesh Punater, Gravitas founder and CEO, said the company is focused on alternative investments, hedge funds and private equity which he expects will grow 50 percent over the next few years as institutional investors try to make up for underperforming portfolios. Alternative fund managers are turning to Gravitas for a better dashboard on risk and performance management, he added. Investors are looking for a lot more risk controls around what they are allocating to firms, and they want risk reports. Finally, funds need to file reports with regulators.
“Before, a small fund didn’t need it, now they have to invest in risk and reporting. We have packaged the risk technology from Algorithmics, our risk expertise and our own technology platforms. We offer the benefit of scale but in a customized fashion for each client.”
Punater started working with hedge funds in 2004 and then in 2008 came up with what he calls a co-sourcing model where the client remains an integral part of the service and has a lot of control over the work product, staff and technology. Gravitas and the client together select seasoned offshore risk analysts with buy-side and sell-side experience. The analyst is hired by Gravitas but directed by the client either on-site or off-site. Gravitas can use whatever risk system the client prefers and can also offer the IBM risk engine from Algorithmics, which is a large and powerful engine that was used by big banks. The company says hedge funds can save at least 40 percent of the cost of creating an in-house risk solution.
“To take advantage of time zones, we opened an office in Mumbai four years ago. Now we leverage analysts in Mumbai and Europe. They do a lot of the data crunching, so when the client comes in at 7 or 8 a.m. their reports are ready for them. We extend the work lifecycle to almost 22 hours per day.”
The company has 94 customers including 11 using its risk services, he said.
Financial reporting has gone from monthly to intraday and even real-time for internal needs and monthly or weekly for investors, he said.
“We cover assets across the board — equities, swaps, futures and every structured credit product you can think of — that is the power of Algorithmics (now called IBM Risk Analytics). Now we can offer a risk platform that is used by all the big banks.”
Gravitas risk analysts can aggregate data from multiple sources and normalize this for custom reporting. (The fund no longer has to deal with different reports from different prime brokers.)
This article is available online at: http://www.forbes.com/sites/tomgroenfeldt/2013/06/24/distressed-debt-fund-monitorsand-hedges-its-risks-for-low-volatility/