Press Releases
Learning from Amaranth: appropriate quantitative models critical to monitor hedge fund risk, according to Riskdata.
October 19, 2006
Riskdata, the leading risk management provider for alternative investments, today released a research paper to clients discussing what lessons the industry can learn from the Amaranth blow-up and how appropriate quantitative models, such as Riskdata's FOFiX system, can provide funds of hedge funds and investors with powerful analysis which is critical for monitoring hedge fund risk.
Riskdata, the leading risk management provider for alternative investments, today released a research paper to clients discussing what lessons the industry can learn from the Amaranth blow-up and how appropriate quantitative models, such as Riskdata's FOFiX system, can provide funds of hedge funds and investors with powerful analysis which is critical for monitoring hedge fund risk.
The blow-up at Amaranth has been viewed by analysts as an operational risk problem rather than a market risk problem:
- Unlike the LTCM crisis, there is no systemic impact on other funds or asset classes.
- The blow up resulted from specific large trades on North American gas calendar spreads, which have a tenuous relationship with macro economic factors such as the oil price - on a short term basis, gas and oil prices tend to be uncorrelated.
Moreover, according to a number of its investors Amaranth was fairly transparent, providing good and high frequency qualitative information.
The blow-up has rejuvenated a debate around risk management measures, with some believing that events such as Amaranth are beyond the scope of any quantitative risk system designed to detect systematic risks. However, Riskdata's FOFiX delivered three clear quantitative signals on the Amaranth fund, starting far before the first May draw down:
- A rapidly increasing level of risk since the beginning of the year, culminating in a level of 45% above that of the S&P500 before the first draw down in May, and 89% above the S&P500 by the end of August.
- A persistent and significant exposure to energy related factors (Oil, Equity Energy and Material Sectors) followed by a surprising factor profile drift in August.
- A very strong risk concentration on Gas from the beginning of the year when the analysis is expanded to include Gas factors. This is followed again by a surprising profile drift in August, with a significant downside risk.
This shows that a quantitative system like Riskdata FOFiX can give strong support to the monitoring process, raising issues for qualitative analysis and enabling further discussions with the manager, especially around precise risk factors that could trigger a negative scenario — without requiring daily access to full portfolio transparency:
Olivier Le Marois, Chief Executive of Riskdata commented: "The key question for any risk management system is to know if it was possible to anticipate the Amaranth blow-up through a structured quantitative analysis. We can show that Riskdata FOFiX delivered three clear quantitative signals since the beginning of the year, well before the first Amaranth drawdown in May".
"Moreover, even if classical risk measures such as VaR (for instance "open-source RiskMetrics methodology"- like techniques) gave an advanced signal (ie point 1 above), this by itself is not sufficient. There are many other occurrences of increased VaR on the markets that are not alarming. Methodologies accounting for hedge funds specificities, such Riskdata FOFiX (ie points 2 and 3), focus risk managers' attention on much narrower and clearer signals, while leveraging qualitative insights."
Ends
For further information please contact
Riskdata
Riskdata Americas
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New York
Tel: +1 212 931 57 94
Riskdata Europe & Middle East
15 Stratton Street
London
Tel: +44 20 7659 0433
Media
Fishburn Hedges
Andrew Marshall/Mark Tierney
Tel: +44 (0)20 7839 4321
andrew.marshall@fishburn-hedges.co.uk
About Riskdata
Riskdata ASP solutions meet the risk management needs of the alternative investment community. They allow Riskdata clients to attract the most demanding investors, satisfying the demand for risk transparency and implementing a structured risk management process. Riskdata FoF clients have experienced an average 60% growth in their assets under management in the past year.
Riskdata's FOFiX® product for hedge fund investors boosts efficiency, lowers costs and cuts operational risk. It is the only solution which streamlines the aggregation of risk, whatever the underlying level of transparency. All available manager information is processed using advanced statistical techniques to detect behavioral asymmetry and regime change.
Riskdata's HEDGiX® product is designed for Hedge fund managers, covering all asset classes, including OTC derivatives. Its Risk Ticker technology removes the need for a costly "in-house" market data cleansing process. It integrates a powerful report designer, to combine customized templates and report production automation.
“The challenge for us was to get an aggregated view of the fund risk profile while tracking the specific risk of each underlying strategy. We think Riskdata is able to address both of these issues simultaneously. Moreover, we can monitor the impact of any portfolio allocation on the fund risk profile.”
Philippe Uzan,
CDC IXIS Multi-Strategy Fund
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