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Liquid Holdings

Part 3: A Fund Manager's View on Working Closer with Investors

  • Monday, March 23, 2015
  • Source: Liquid Holdings Group, Inc.
Part 3: A Fund Manager's View on Working Closer with Investors

 
This week, our blog-series 'A Fund Manager's View on Working Closer with Investors' shifts its attention to risk analytics reports that institutional investors expect as part of the month-end report packet.  The CIO of a $90-million equity long/short options hedge fund uses the Historical Value-at-Risk (HVaR) and Historical Stress Testing in LiquidMobileSM to actively monitor risk limits, and as important, to prove that the risk limits and other portfolio related stats are credible—a result of being calculated by an objective, market-tested risk analytics system. 

Historical Value-at-Risk (HVaR)

This report is used with investors to answer the question, ‘how much can the portfolio lose with x% probability over a set horizon’.  In this case, the CIO monitors the probability that losses in the portfolio will exceed $10 million dollars in one day out of twenty due to market movement.  The CIO interrogates the analysis further to pinpoint the sub-strategies and specific securities that will contribute the largest expected falls in the value of the portfolio on that one day.  The model uses a twelve-month look-back period to put more weighting on recent market conditions which ensures the analysis remains reactive to recent events. The twelve-month look-back period also makes the HVaR model more likely to provide early-warning signals back to the CIO so he can proactively manage and make changes to compliance limits where necessary.

 
Part 3: A Fund Manager's View on Working Closer with Investors



While his investors still require VaR modeling as part of their reporting mandate, the financial crisis highlighted, among other things, that distributional risk statistics such as VaR break down under extreme market conditions. Fast forward to today, VaR remains a viable part of the firm's buy-side risk framework, augmented by risk analytics including ‘historical stress-testing’ to report the full spectrum of potentially adverse conditions facing the fund’s investments.

Historical Stress-Testing

Historical stress-testing allows the CIO to define the period of interest the price of each security in the portfolio is adjusted to, and to simulate how the portfolio would react to the stress felt at that point in time. The CIO frames how the portfolio would react to different historical scenarios including 9/11 and the Asian Market Crisis, as well as how the portfolio would react to time frames in the past when options-based strategies underperformed key benchmarks. 

To better interpret the different stresses, the CIO and investment team rely on custom dashboards in LiquidMobileSM that update regularly to reflect the portfolio’s status in real-time.  Rather than the investment team asking the CIO a question, they refer to LiquidMobileSM to investigate the analysis down to the security-level.  The integrity of the data ensures the analysis used by the investment team is accurate, so the right investment decisions can be made.   The integrity of the data is also central to his investors—they want 100% confirmation that the performance and risk profile of the fund are precise at all times so they can make the right allocation decisions while protecting their investments.


For a free trial of the application, contact us today.

Read part-one of this blog here and read part-two of this blog here. 

About LiquidMobileSM

LiquidMobileSM is a web-based app that allows hedge funds and other asset managers to monitor portfolio and risk analysis and reporting across multiple portfolios on a mobile device in real-time, all the time, everywhere.  The app is engineered for fluidity from the desktop to any mobile device, giving fund managers the ability to easily interact with historical, real-time, and forward-looking P&L, performance, market and liquidity risk, and NAV-light calculations. With mobile-optimized dashboards and reports to monitor investments and investor relationships on the go, LiquidMobileSM represents a major step forward for the hedge fund industry, which today faces rising pressures across transparency, regulations and operating costs.

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