Press Releases
Riskdata research shows that 30% of funds trading illiquid securities smooth their returns
June 29, 2007
New "Bias Ratio" indicator helps detect Hedge Fund Return Smoothing
London - 29 June 2007 - Research by Riskdata into the behaviour of over 1,000 hedge funds reveals that at least 30% of hedge funds trading illiquid strategies are smoothing returns. Riskdata, the leading provider of risk management solutions to the worldwide alternative investment marketplace, based its analysis on a new indicator called the Bias Ratio that helps in monitoring hedge funds and completing due diligence. The Bias Ratio indicator is incorporated into the latest version of FOFiX, Riskdata's core risk management application. This new indicator can assist in detecting manipulation of the Net Asset Value (NAV) when illiquid securities are involved. In addition, the Bias Ratio feature can help recognize the presence of illiquid securities where they shouldn't exist.
Olivier Le Marois, Riskdata's chief executive officer, commented:
"Our results give strong statistical support to the assumption that the Bias Ratio is an indicator of return smoothing. There is a clear statistical relationship between the liquidity of the strategies and their Bias Ratio. 80% of the high liquidity strategy funds in bucket have a low, statistically insignificant Bias Ratio, while only 3% of the funds running very illiquid strategies are in that position. On the other hand, over 30% of funds trading illiquid strategies such as MBS or ABS have a very high Bias Ratio. So our research confirms that - as a group - funds with illiquid strategies are more likely to be smoothing their returns. Importantly, this does not necessarily imply unfair NAV manipulation, simply that valuation is based on an in house subjective process, rather than on objective process."
The Bias Ratio indicator was originally created by Adil Abdulali, Risk Manager at Protege Partners, who developed it through hands-on experience while trading as an MBS trader on the sell side, managing a hedge fund and investing with managers. The Bias Ratio relies on analyzing fund returns to measure how far they are from an unbiased distribution. The Bias Ratio of an equity index will typically be close to 1. On the other hand, the Bias Ratio of a fund that smoothes returns is much higher.
About Riskdata
Headquartered in Paris with offices in New York and London, Riskdata is the leading provider of risk management solutions for the global fund and asset management community. Riskdata’s significant experience with the alternative markets quantitative modeling and IT development makes it an authoritative provider of state-of-the-art risk solutions. Riskdata has more than 150 clients across North America, Europe and Asia.
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