Hedge funds are investing in risk management, stepping up internal scrutiny and preparing for worst-case scenarios. The industry has embraced specialist vendors and commercial off-the-shelf (COTS) products to help implement state-of-the art system architectures that can meet existing and potential requirements, address burgeoning regulations, and enable expansion into new asset classes and strategies.
Lack of a proper risk management system can be a major contributor to failure. Poor management oversight and operational risk are as likely to spawn failure as the fund’s investment strategy. At the same time, hedge funds are facing heightened scrutiny from regulators. This is forcing them to rethink their risk management procedures to ensure proper compliance and accountability.
Building and supporting in-house systems can be extremely costly and cumbersome. Technology departments at hedge funds are not big enough to support the operations of existing systems while embarking on a strategic rebuild of one or more systems.
The industry is also undergoing a major shift in how risk data is computed, aggregated, and visualised. Risk managers and desk heads want to view risk in near real time aggregated across multiple systems within the enterprise. The challenge for risk architectures is moving from being able to compute large amounts of risk metrics to having the ability to analyse and visualise that data to make decisions in real time.
Traditionally, hedge funds have used batch-based risk architectures to compute and view their risk data. Some of these calculations are computationally intensive and the risk data may not available to clients until the following day. With the introduction of multicore CPUs (central processing units) and cheaper memory, the industry is looking to build scalable risk implementations that can help improve the performance and reliability of such systems.
Meantime, risk managers are challenging technologists within their organisation to provide them with up-to-the minute risk data. Architecting systems that provide real-time computation, aggregation, and visualisation of risk requires a strong understanding of optimisation techniques and distributed computing. Hedge funds are moving in this direction as it better enables them to proactively monitor trader portfolios and extract actionable intelligence from analysing market stress scenarios across portfolios.
Any system designed to address these evolving issues must be able to adjust to the ever-growing need for new products and trading strategies. Strategic risk systems require time to get off the ground and to arrive at a stable running state. Replacing legacy architectures requires a considerable amount of back and forth between consumers of risk and the models that are used to produce those numbers. Transition can be painful, as traders and portfolio managers are attached to the systems and numbers they have been using for years.
Robust reconciliation between the legacy and strategic systems must take place to ensure there is no overstatement or understatement of risk when the switch from old to new occurs. Once the strategic system is up and running, the effectiveness of the new architecture is proven not only by its ability to meet the current demands, but also the ease of quickly adding new products and analytics to the platform.
Hedge funds are best served by a vendor that specialises in providing niche IT solutions in the risk domain and the resources to help bootstrap their strategic build-outs. Such vendors combine proprietary implementations with highly specialised third-party vendor products to deliver robust time-to-market solutions.
Technology associated with Big Data, aggregation, and visualisation components are constantly evolving, and hedge funds need nimble and scalable solutions for quicker adoption of such technologies to satisfy future requirements.
No single enterprise risk system is going to satisfy the needs of the entire hedge fund business, and scalability is essential for supporting multiple systems. Stable yet flexible core risk architecture brings together vertical systems across the enterprise by enforcing reusability and discipline across the entire platform for all analytical models.
The right experienced partner can jump start the initial implementation of a strategic architecture, allowing hedge funds to ramp up system delivery while continuing to support current operations. A sound migration plan for moving from legacy to strategic implementation ensures minimal business interruption and a smooth knowledge transfer to client resources.
By Vadim Gelman, Vice President, Risk Focus and Srikant Ganesan, Head of Risk Solutions Practice, Risk Focus