The push for greater investor transparency and new regulatory compliance demands are threatening to push asset management firms over the edge in terms of cost containment.
“The new regulation focusing on transparency and reporting will strain their capabilities further by requiring that they be able to quickly and accurately report on positions, valuations and counterparties, among others,” said Matthew Nelson, executive director of strategy at Omgeo, a provider of post-trade services. “Further, both traditional and hedge fund managers will face new requirements, leading to a broad need to invest in data management across the buy side.”
This is leading risk management providers to develop innovative methods of delivering their services, and in the process remove the burden of risk measurement from asset managers.
“The cost to implement software, maintain hardware and update quantitative models, which can be substantial, should not be placed on the shoulders of money managers,” said Andrew Peddar, chief executive of StatPro North America, a software provider.
“Risk measurement is crucial to managing money and we can provide this critical service to managers while removing the costs.”
StatPro Group’s recently-launched Risk Bureau Service addresses evolving industry regulation, including the pending implications of Dodd-Frank Form PF, which is designed to provide greater disclosure and transparency, with risk management functions such as a simulation-based approach to value at risk and stress testing, over 300 pricing functions to capture the pricing effects of different scenarios on different types of instruments and strategies, and the ability to run various confidence intervals and time horizons.
“The past few years are indicative of the weaknesses inherent in traditional measures of risk,” said Peddar. “Clients and investors are demanding more sophisticated risk models in an easy to understand reporting format as a result of the volatile investment climate.”
New regulations, especially Form PF, present unique headaches for asset management firms.
“This Dodd-Frank requirement will be mandatory and will prove to be a nightmare for some managers, especially those who haven’t built out a formal risk reporting system,” Peddar said. “Maintaining hardware, software and quantitative models are substantial in themselves, but any unexpected operational costs can be very detrimental.”
Another issue that firms may need to address is the idea of transparency and disclosure. Many hedge funds and private funds tend to be very protective of their positions.
“There is a new mentality among clients and investors now,” said Peddar. “In this era of regulation and volatility, clients expect more transparency and communication with managers. Assets managers now need to be able to provide an adequate level of transparency while maintaining their competitive strategies.”
