Assembling the Risk Puzzle
Furnishing investors with a timely, accurate and sophisticated picture of risk in underlying funds may not be an overwhelming task for firms that manage all their funds in-house. But for a firm such as New York-based Fairfield Greenwich Group (FGG), a manager and provider of alternative investments that also makes some external hedge funds available to its investors, providing the same intensive risk management overview takes considerable coordination.
FGG manages more than $9 billion across 30 private hedge funds. Those funds consist of single-manager funds (more than $5 billion in assets under management), multistrategy funds (more than $1 billion) and funds of hedge funds (more than $2 billion). To facilitate a holistic view of risk, FGG requires that its underlying funds afford a high-level of transparency so data on their positions can be aggregated and fed into systems for fund and firmwide risk and compliance assessments.
To accomplish this, "What they need on a consistent basis are statements from the hedge funds," says Denise Valentine, senior analyst with Boston-based Celent. "And what they have to cope with is the fact that there will be various degrees of automation with each hedge fund -- some will send flat files, some will send XML and some are more sophisticated."
For FGG, that data collection is achieved in many ways. "We receive the data any way we can get it -- meaning directly from the managers or their prime brokers, or our administrators," says Jason Elizaitis, FGG's director of IT. "We aggregate a tremendous amount of data to power the risk systems."
Currently, the firm uses two primary methods to aggregate data, however. The first is via direct pipelines from eight prime brokers, some of which handle multiple FGG funds. At the end of the business day, different divisions within the primes deposit files -- including transaction files, position files and gain/loss files -- to the firm through file transfer protocol (FTP) sites.
FGG also collects data directly from the underlying managers and administrators. Again, the firm's risk group works to reconcile the multiple sources of incoming portfolio information to make sure the data is clean. In fact, FGG often prefers to receive information on its underlying funds from the third parties with which it works, rather than directly from the funds themselves.
"Independently receiving portfolio information from the managers is critical for our investment-compliance and risk-oversight function," according to Amit Vijayvergiya, head of risk management at FGG. "We rely very heavily on what we receive from those independent sources -- whether they be administrators or prime brokers." Information received directly from the managers augments the third-party data, he adds.