Alternative Investments form one of the investment vehicles that provide high returns to the investors, but at high risk. The risk in alternative investments is driven by factors such as:
It is thus essential for the Fund Managers to assess the risk of their portfolio periodically and take necessary actions as and when required.
Risk assessment is critical for two reasons;
Risk assessment includes pricing (closing price, average traded price etc.), valuation and counter party credit assessment. It is recommended for Fund Managers to do risk assessment on a daily basis either by themselves internally, or via a report from the Administrator to whom the fund accounting is outsourced.
Though the stress and risk related questions in the reporting template for the Alternative Funds are optional till date, they are answered on the basis of assumptions and are not always calculated accurately. Currently, European Securities and Markets Authority (ESMA) have not mandated any standards on risk reporting and frequency of separate risk reporting. In the absence of any such mandate, it is important for every Fund Manager to take reasonable steps to assess risk accurately at regular intervals. Here are some of the recommendations that the Fund Manager can follow to assess the risk involved.
It’s recommended to price the instruments on the closing price basis than on last traded price basis since the last traded price may not always show the true value of the instrument.
It’s recommended to use the Yield Basis method to determine the valuation of the portfolio. If the fair value method is used, the valuation may not present a positive scenario of the stocks in a portfolio in an economy downturn, and Fund Managers may end up selling good stocks.
It is recommended to consider the leveraged levels of the fund and the parties to which the fund is leveraged and the credit worthiness of the creditors and debtors to the fund, on a periodic basis.
Until ESMA comes with a clear mandate on risk assessment and reporting, Fund Managers have to devise procedures to assess risk specific to each fund, based on its investment style and portfolio holding, pricing and valuation.
In case the fund accounting is outsourced, in order to aid the Fund Managers with risk assessment, Fund Administrators should also consider reporting risk metrics to Fund Managers in addition to their current offering.
About DataTracks: DTracks Limited is a subsidiary of DataTracks Services Limited. With more than 10 years track record, DataTracks is a global leader in preparation of financial statements in XBRL and iXBRL formats for filing with regulators. DataTracks prepares more than 12,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.
The views expressed are that of the author’s and DataTracks is not responsible for the contents or views expressed therein. If any part of this blog is incorrect, inappropriate or violates the IP rights of any person or organization, please alert us at email@example.com. We will take immediate action to correct any violation.