Transparency challenges addressed
Innocap updates HFMWEEK on the developing use of dashboards to improve transparency through better communication between investors and managed account platform providers
HFMWeek (HFM): Do you feel there is a greater need for transparency now than few years ago?
Jean Baram (JB): The simple answer is yes. Initially, the 2008 financial crisis was the trigger for more transparency and in the past couple of years we have seen an increase and an intensification in terms of compliance, whether it is required by the SEC or European regulators, for example. All over the world, there are a lot of changes surrounding compliance. This comes in line with an increase in governance demands from clients. We have seen clients’ higher management requesting for more governance to be established within their internal teams, to ensure that they are able to look at specific areas of concern and regulation requirements.
Before getting into transparency, there is a need from investors and regulators to radically change the environment. We’re seeing an increase in the number of jurisdictions in which our investors are active, which means more regulations to comply with and more reporting. EMIR and AIFMD are all eff orts to provide more transparency to regulators and we think it’s only the beginning of what we will see in the future. With this in mind, technology is key and must be central to the offering.
HFM: Would you say this drive towards greater transparency is driven solely by regulators?
JB: No, the drive towards greater transparency is also driven by investors. In the last five years, investors have left funds of hedge funds (FoHF) for direct investments. This trend towards direct investments and the disintermediation of FoHF has been a more subtle and fundamental cause for the need for transparency. In a commingled FoHF invested in commingled hedge funds, transparency was not possible, and portfolio managers overseeing these allocations were limited to high-level conversations with the FoHF managers who, in turn, conversed with individual hedge fund portfolio managers. With direct investments, large institutional investors can negotiate to have transparency in a reasonably timely way. With funds of one or segregated managed accounts, this can go even further.
Clients are also more sophisticated now and want to integrate our data into their databases, access this data and take part in the decision-making process. Therefore, there is a greater need to have a dialogue with the managers, and from our side, a more meaningful discussion with the clients about their portfolios. All this has added to the pressure to gain more transparency.
Basically, the hedge fund industry is just catching up with the rest of the world in terms of information transparency.
Foreseeing the evolution of information requirements, Innocap decided many years ago to invest in its data system. Today, we are increasing eff orts towards making this information available to investors by providing additional tools to achieve this objective. This implies that multi-jurisdiction and multi-administrator data from many different sources must be properly integrated in a centralised system.
HFM: How have technological advancements facilitated risk management?
Philippe Arnau (PA): The technology available to risk managers has only been developed relatively recently. It’s only recently that we have started to see people developing more dynamic, efficient tools to sift through the data. The demand for these tools from investors comes from experience outside of the professional world. In our day-to-day lives, we demand simplicity and convenience from the products that we use. Now, investment professionals want the same kind of facilities in their working life. They won’t tolerate sifting through long lists of positions looking for abnormal risk or exposures, they want to be alerted to them by an intelligent display that manages the information for them.
HFM: What is required to develop dashboards and what are the challenges surrounding that development?
PA: Beyond IT requirements such as a robust technological infrastructure, automated quality assessment and strong security processes, you need strong analytics to be able to aggregate and summarise risks in a way that makes the complexity of the underlying portfolios easily graspable without losing significant information.
Building a drill-down dashboard with top-level, midlevel and detailed position information is relatively easy. However, investors are demanding a dashboard that will alert them of only the essentials. The real challenge is finding a way to summarise this in an easy-to-visualise dashboard display where you can seize what you need without omitting risk factors or over-simplifying.
Previously, clients were looking for a partner who would look at their portfolios and ensure that their investments are well-maintained. These days, they want us to share the risk management tools that support our decisions. As they are increasingly investing in complex strategies, they want more information on the implications of these investments. Instead of simply having rigid and regular reporting, they want a more dynamic relationship, based on dialogue.
HFM: With clients demanding more and more from you in terms of reporting and communication, what challenges have you faced in meeting that demand?
JB: Once you build on your transparency and start to open new communication channels, the discussion becomes broader and more profound. It’s not strictly about having more communication traffic but you will certainly have more meaningful conversations with your clients. This question also brings us back to the issue of dashboards and the challenges of creating a high-quality method for investors to review data efficiently.
We are also being asked questions we have rarely been asked before such as: “Is the calculation of the DV01 homogenous in all asset classes?” This adds a new level of in-depth transparency which can put some pressure on us at first. However, it is important to remember that once the dashboard is implemented, we gain efficiency so the new questions we get are easier to answer and the discussions can become much more meaningful for everyone. With better communication channels in place, the level of depth into risk modelling, the data analysis, the details of the trade structures and the positioning of the funds are all made significantly easier to understand.
HFM: How are the challenges of transparency and risk management likely to evolve in the coming years?
PA: The need for transparency will only increase and the associated challenges will also grow. Institutional investors hold positions in a lot of different asset classes and still have a very fragmented view of their risks. As time passes, this will become less acceptable. This means that a firm which could aggregate positions and risks across administrators, fund structures, asset classes and different levels of strategy complexity will be well positioned to answer the future needs of clients.
Dashboard developments are still in their early stages and there is still a lot of leeway for interactive elements to be developed. In the future, the client will want to comment on what they have seen and for us to respond in turn.
When you are talking about dashboards exchanging information, it is essential to ensure there are tight controls around the information and that all information sent to the client is protected. Security is increasingly important as partners want to participate and put forward their views of either the risk factors or risk overall. At each step of data transfers, you need to ensure there is high security.
Finally, big data management will be key. There is an increasing amount of data being produced and that will require an improvement in the tools available to be able to deliver the level of transparency and effective reporting that clients are demanding more and more.
Jean Baram is managing director, business development and investor relations, at Innocap. He joined the firm in 2007. After graduating in 2002 with a Bachelor’s degree in finance from HEC Montréal, he held several roles within the Treasury Department of the National Bank of Canada. He is also a chartered financial analyst and a CAIA charterholder.
Philippe Arnau is managing director, risk management and due diligence, at Innocap. He joined the firm in 2010. After graduating with a Master’s degree in economics, he held several roles within the industry, including investment strategist at Desjardins Asset Management from 2006 to 2010 and as a hedge fund analyst from 2001 to 2006.