Cloudy with a Chance of Transparency

Anthony Malakian, deputy editor, BST

I'm a sharing person. When I was a kid, my parents told me to let the other children in the neighborhood play with my toys—I did, and I'm a better man for it.

So, allow me to share my thoughts with you about two reports I read this week. (Unfortunately, no cool toys to share this time.)

First to the plate is State Street, which released a white paper, “Hedge Funds: Rebuilding on a New Foundation.” The report examined how the hedge fund industry will continue to move forward now that it is managing more than $2 trillion in assets. From a technology perspective, the paper examined two themes—and these are nothing novel: risk management and transparency.

In the quest to best manage risk and facilitate transparency, State Street says investors will increasingly "look to global-scale custodians and administrators with proven technological expertise and capabilities." Additionally, the firm sees cloud-computing becoming more important in supporting a 24-hour trading clock and "integrating information across front-, middle- and back-office systems and delivering it through Web-based portals."

(For more on State Street’s cloud strategy, read my profile of Chris Perretta, CIO of the firm.)

State Street adds that "the outsourcing of middle-office functions to third-party administrators makes clear that administrators are evolving into critical intermediaries between hedge fund managers, investors, prime brokers, investment banks, trading venues and clearing entities."

Finally, the report says that as the vendor community serving hedge funds continues to expand, "it may also help pave the way for new classes of investors, notably small and mid-sized pension funds, to consider hedge fund investment for the first time."

The other cantle of information I’ll share with you comes from Vancouver-based Fincad. In its annual corporate survey, it polled 313 financial professionals working for non-financial corporations. More than half of the respondents reported that they began running scenario/sensitivity analysis in order to adjust their risk management strategy. Some 41 percent now use Value-at-Risk (VaR), while 31 percent said they have not made any adjustments.

Interestingly, nearly two-thirds of respondents said they are still using internal spreadsheets to understand and manage threats to liquidity, and—horrifyingly—one quarter said they don’t use anything.

Also of note is that 60 percent do not include any sort of credit value adjustment (CVA) for their derivatives valuation, and 28 percent do not conduct hedge effectiveness testing under regulations such as IFRS 9, IAS 39 and FAS 133.

Finally, about 60 percent said their companies' IT budgets would remain flat or decrease. Double-dip recession, indeed.

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