Tougher risk parameters at hedge funds are restricting trading activity, with credit trading most likely to be affected, new global research by Beacon Platform Inc shows.
Almost all (93 per cent) senior hedge fund executives questioned said risk parameters are becoming stricter at their firm in terms of what they can and cannot trade. Almost all involved (95 per cent) say they are having to reduce trading in some areas because of the growing risks or because they don’t have a good enough understanding of the risks in that area.
Beacon’s research with 100 hedge fund executives in the US, UK, Germany, Switzerland, France, Italy, Sweden, Norway, and Asia responsible for a collective USD901 billion assets under management, revealed that most funds (84 per cent) see trading restrictions as an increasing trend over the next three years, with 9 per cent seeing a dramatic increase.
More than three out of four (76 per cent) said they had seen restrictions on areas they can trade, while 56 per cent said there were restrictions on the value of trades. Nearly half (46 per cent) said the level of reporting they have to do has increased, and 23 per cent say they have to wait for risk analysis before trades.
The study by Beacon, the cross-asset portfolio analytics and risk management platform for multi-strategy hedge funds, found credit trading is the area hedge fund executives believe is most likely to be reduced due to tighter risk parameters, as the table below shows.
A related Beacon study reported that a surveyed group of institutional investors had some concerns about their hedge fund investments—85 per cent have decided not to invest in a particular fund because of concerns over its risk management, and almost all (93 per cent) think that this will be a growing trend.
The study also asked executives about their visibility of risks and what they are doing to improve it. Only 15 per cent rated their hedge fund’s risk visibility as excellent, but 75 per cent rated it as good, and just 10 per cent as poor.
When asked to rank the most important actions they had taken to improve visibility of risks, they listed as the top three:
- Greater investment in technology (55 per cent)
- Having a platform that makes it easy to integrate and aggregate risk data across multiple asset types (54 per cent), and
- Having a system that they can use quickly, but in a controlled fashion, revise or customise models and analytics to adapt to changing market conditions (48 per cent)
Kirat Singh, CEO and Co-Founder, Beacon Platform Inc. says: “As risk parameters at hedge funds become stricter, some firms are having to consider giving up certain types of trades or curtailing activity in certain sectors. That is putting additional pressure on the tools and technology needed to make these decisions. But it also opens up opportunities for those that can quickly develop a clearer understanding of new and different risk scenarios, and make informed trading decisions, faster.”
