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Digital Subscriptions > The Hedge Fund Journal > Issue 111 - February 2016 > Considering the Alternatives

Considering the Alternatives

A practical look at enterprise risk analysis and alternative investing

Abstract

Enterprise risk analyses, such as stress testing and scenario analyses, are increasingly popular with institutional investors. Alternative investments, such as hedge funds, private equity and real estate, present challenges to enterprise risk analysis.

• As institutional investors are increasing allocations to alternative investments, how are they addressing the challenges of incorporating illiquid or non-transparent investments into enterprise risk analysis?

• How do different approaches to data management affect the resulting risk analysis?

• What are the benefits and risks of different approaches to this challenge?

In this white paper, BNY Mellon’s Global Risk Solutions and HedgeMark Risk Analytics, a BNY Mellon company, explore these issues and offer examples of possible solutions.

Key observations and insights to best practices include:

• Different approaches to data management can lead to different potential conclusions about the risks within an investment portfolio.

• Use a consistent approach across the most granular detail available to evaluate investment risks. Obtaining position-level information for all asset classes is generally considered the best practice.

• Consider hedge fund structures that can provide position-level transparency, liquidity and control. Hedge fund managed accounts and liquid alternative funds are increasingly popular structures that offer such features.

• Using a single vendor to pull together an institution’s total investment data enables a more uniform approach in calculating enterprise-wide risk and exposure, whereas data across multiple platforms adds to the complexity and likelihood of errors.

• Evaluate volatility-based measures like Value at Risk (VaR) as just one element of a broader risk management framework that considers other factors such as exposure. Consider VaR for portfolios relative to the total composite, as a benchmark, or over time, rather than as an absolute value.

To view the full paper, please go to: https://www.bnymellon.com/us/en/our-thinking/enterprise-risk-analysis-and-alternative-investments.jsp

INTRODUCTION

Enterprise risk analysis defined

Risk management can mean different things to different people. Enterprise Risk can include all the many aspects of risk that affect an organisation including but not limited to market risk, reputational risk, regulatory risk, compliance risk, operational risk, and legal risk.

Enterprise Risk Analysis can also mean forward-looking (“ex-ante”) risk calculations that estimate investment risks across multiple asset classes. This paper focuses on the definition of Enterprise Risk Analysis that estimates ex-ante risks of an investment programme with multiple asset classes owned by a single organisation, such as a pension plan or a charitable foundation. Ideally, this risk management discipline should be a component of a larger “enterprise-wide” risk management framework that also considers risks other than investment risk.

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INFORMING THE HEDGE FUND COMMUNITY With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.
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