Hedge fund organisation wants best practice, not regulation Senior figures from the hedge fund industry have indicated that they want to resolve investors' demands for transparency by coming up with a set of industry best practice guidelines rather than subject it to outside regulation.Members of the International Association of Financial Engineers' investor risk committee, which is made up of senior professionals from the hedge fund industry, insist that investors will not be any better off with full disclosure of hedge fund dealings. The industry has been under pressure to reveal clearer information to its investors for years. But the issue has come to a head in the past few months as the US Securities and Exchange Commission has started exploring whether it should craft new rules to demand better transparency from hedge funds. The SEC is awaiting responses from hedge fund managers to a detailed questionnaire about their business practices. IAFE committee members, including Leon Metzger, president of Paloma, a US hedge fund, and Mark Anson, chief investment officer of Calpers, the world's largest pension fund and a big investor in hedge funds, agree that more disclosure is necessary. But they are firmly against the idea that hedge funds should have to disclose details about each security they hold and what they paid for it - known as position transparency. Instead, they believe that hedge funds should simply lay out broader-based information about the nature of their most important exposures - known as exposure transparency. Anson says: "Position transparency is still a remote possibility. But exposure transparency is preferred. We do not believe that position transparency is the right answer." The committee does not believe that investors would benefit from receiving a deluge of raw information each month or quarter. Leslie Rahl, president of CMRA and chairman of the committee, says: "For many people the ability to digest this kind of information may be beyond them." Exposure transparency would be designed to give investors an idea of a fund's risk profile. It would include information such as the top 10 holdings of a long/short fund, or credit exposure details as well as option and volatility risk in a convertible bond fund. (October 9, 2002)   CMRA's Rahl cool on hedge fund position-level transparency Complete position-level transparency could prove\ detrimental to the development of the unregulated hedge fund industry, according to Leslie Rahl, president of New York-based consultancy Capital Markets Risk Advisors (CMRA) and author of a new book on the subject. "I believe, more and more, that position-level transparency can do more harm than good," Rahl told RiskNews. The reason: investors are largely incapable of processing position-level information in a meaningful way. "With some funds, it is difficult to put their positions through a risk management system, for example, merger arbitrage funds that use off balance sheet synthetic puts based on event risk," Rahl added. Rahl is chair of the investor risk committee of the International Association of Financial Engineers (IAFE) committee on hedge fund transparency, and has campaigned for more transparency in the hedge fund business for years. But research into her forthcoming book, Hedge fund transparency. Unravelling the complex and controversial debate, led her to the slightly surprising conclusion that full position transparency could lead to more, rather than less, confusion for investors. But she is still a firm advocate of investors being given more access to information. "But we need to translate that into a hedge fund reality," Rahl said. Rahl also believes the current nomenclature for hedge funds is confusing to the average investor. She believes funds should be classed in accordance with their strategy type, rather than the asset class they cover. Risk profiles can then be developed by strategy type and templates created for comparisons on a strategy-by-strategy basis Research for her book included interviews with leading investors, hedge funds and fund-of-fund participants. Her book, due for publication by Risk Books in November, contains a number of perspectives written by leading proponents in the investment industry. These include Mark Anson at Californian state employees pension fund Calpers, Paul Platkin, who runs General Motors Pension Plan, Ron Mock from the Ontario Teachers Pension Plan and Myron Scholes at Oak Hill Capital, among others, (October 31, 2002)   IRC Surveys Industry on Transparency and Valuation Practices NEW YORK - Members of the International Association of Financial Engineers’ Investor Risk Committee are conducting surveys in preparation for a January meeting with regulators, the results of which will be discussed at its upcoming meeting. The steering committee of the IRC is now circulating surveys on risk transparency and valuation practices to be filled out by hedge fund managers, hedge funds of funds firms, and other investors. The survey was created in response to the issues and developments at Beacon Hill with its mortgage-backed securities fund that had such stunning losses in such a short period of time. While some of the basic questions surrounding transparency may be the same, each survey is tailored to get each industry participant’s viewpoint. Hedge fund managers are asked about what types of information investors ask for in risk transparency reporting and what types of transparency they currently supply to investors and how often. For funds of funds, the questionnaire asks them to rank the usefulness of specific types of risk information such as Value at Risk, position level transparency and stress test results. Meanwhile, investors are asked whether hedge fund managers disclose the details of their valuation policies. Organizations such as the Alternative Investment Management Association and 100 Women in Hedge Funds are distributing the surveys among their membership and encouraging them to attend the Dec. 10 meeting of the IRC in Boston. The meeting corresponds with the Riskinvest 2002 conference. The IAFE is allowing conference delegates to attend free. At the meeting, officials plan to discuss the results of the survey and the first draft of the reporting requirements for hedge funds as divided up by strategy, said Leslie Rahl, who is the U.S. chair of the IRC. (November 25, 2002)   The Journal Interview Leslie Rahl Mrs. Rahl received her undergraduate degree in Computer Science from MIT in 1971 and her M.B.A. from the Sloan School at MIT in 1972. She spent 19 years at Citibank, including nine years as head of Citibanks Derivatives Group in North America. Eleven years ago, she founded Capital Market Risk Advisors, a risk management consulting firm specializing in risk attribution, derivatives, performance measurement and risk transparency, and is a well-known pioneer in the swaps and derivatives business. Leslie was named among the Top 50 Women in Finance by Euromoney, selected among "Who's Who in Derivatives" by Risk Magazine, was profiled in Fortune magazine's column, "On the Rise" and Institutional Investor's "The Next Generation of Financial Leaders. " Mrs. Rahl was a Director of the International Swaps Dealers Association (ISDA) for five years, is currently on the board of Directors for the International Association of Financial Engineers (IAFE) and the Fischer Black Memorial Foundation (FBMF). She is a steering committee member of the IAFE's Investor Risk Committee and a member of the Board of Advisors of The Financial Engineering program at the MIT-Sloan School and a Senior Advisor to the MIT Club Partnership with NYC public schools. David Spaulding: We always begin the interviews by asking for information on the background of the interviewee, so please share some information about yourself and if you'd like, a little bit about your company. Leslie Rahl: Okay, well I've been in the financial services world for a little over thirty years. I graduated from MIT in Computer Science and stayed on at the Sloan School for my M.B.A. In 1972 I went to work for Citibank for about 19 years, nine of them running the derivative business. I started my consulting firm in 1991. The firm specializes in all areas of risk management including market risk, credit risk, reputational risk, legal risk, operational risk, the full gamut of risk types for all asset classes and all types of participants, including banks and broker dealers on the sell-side and hedge funds, money managers, plan sponsors, etc, on the buy-side. DS: What would you describe as the current state of affairs of how money managers are managing risk? LR: I think risk has not been at the forefront of concern for most money managers and, appropriately so until relatively recently - bull markets are different than bear markets. Risk management can be a proactive tool for strategic planning and thinking, as well as a defensive tool. It's really easy when you're making money hand-over-fist to not focus on the risk side of the equation; it's sort of the human condition. But, I think in the last couple years it's begun to receive quite a bit of focus. We actually did what I believe is the first buy-side focused risk piece, Risk Standards for Institutional Investors, in 1996 with a group of 11 large institutional investors and money managers. It helped layout, from both a traditional money managers perspective, as well as, from the traditional institutional investors perspective, what some of the best practices were for risk control. As time has gone on, more and more investment managers have begun to deal with, in addition to the due diligence and process oriented aspects of risk management, some of the more quantitative aspects of risk, particularly market risk and credit risk. But again, I've always been a big believer that, although coming from an MIT background and liking the quart stuff, it's only about a third of the puzzle. The people who get mesmerized by the numbers are making a huge mistake. I think the numbers are important but they shouldn't be a substitute for good, basic common sense. A lot of the risk focus has recently turned towards hedge funds because of their greater leverage and complexity. Institutional investors moving into the hedge fund space, felt more awareness because it's an area that they're not as familiar with as well as the potential headline risk. So, I think there's been a lot of focus within the investment management community on risk management for hedge funds. DS: The chief investment officer from Yale, David Swensen, wrote that "quantitative measures of risk leave a lot to be desired." LR: I agree. I think that's true. I think risk is a multi dimensional, multi faceted concept, and I'm constantly frustrated by people's desire to take something as complicated as risk and try to scrunch it down into a single number. I was recently thinking that if we take something as simple as, "Is someone overweight?" most of us are fairly comfortable with the idea that you need a few pieces of information to make that judgment. You not only have to know how much they weigh, but you also need to know how tall they are and whether they're heavy boned or frail boned in order to make that determination. So, here we take something simple like "is someone overweight or not" and we need three measurements to make a judgment. Then we take something as complex as the risk of a complex investment strategy, and we keep trying to find one number that tells the whole story. I believe there are a lot of risk measures that add value. When you can string three, four or five of them together, you can get a reasonably robust picture and understanding of the risk in a portfolio. But, if you look at any one of them in isolation, they are of limited value because they're only telling you about the risk of one side of this multifaceted puzzle. DS: We recently  did a survey and asked money managers what risk measures they used and the number one risk measure that was cited was standard deviation. There are some people who would argue that that's not even a risk measure. LR: Right. DS: I'm just curious what your view is on using standard deviation as part of your tool set? LR: I think it's okay as part of your tool set but boy if I'm limited in the number of measures it wouldn't be very high on my list. But, if I were allowed a long string of measures, then I wouldn't quibble with it being one of those measures. But certainly if you were limited to one, two, or three, then it wouldn't be one that I would pick. DS: In the Sharpe Ratio, Bill Sharpe uses the equity risk premium as the numerator but as his risk measure he has chosen standard deviation. I know that it's really only a measure of volatility and as a measure in and of itself, it doesn't point to risk. But I think it gives an implied sense of risk. And, would you agree that it implies that if there's a high volatility that there's something going on that may make me uncomfortable? LR: It may or may not. But it certainly, as I said, is not sufficient as a sole measure. I certainly think that in a robust string of multiple measures it's a fine measure to include, but I think to say risk equals standard deviation is even worse than saying risk equals VaR (Value at Risk) or risk equals a number of other measures that one might come up with. Download entire interview   100 WOMEN IN HFS RAISES OVER $900,000 With contributions still coming in, and the total not yet tallied, 100 Women in Hedge Funds raised over $900,000 at its first gala event on December 2. The organization was founded earlier this year for women working in the hedge fund arena. The inaugural event, which was held at Cipriani restaurant in New York, was a fund raiser to benefit the NYU Cancer Institute. Thanks to a contribution by the benefit's chairman, George Hall, president and founder of the Clinton Group, every dollar raised will go toward breast cancer research and treatment. Leslie Rahl, chair of the philanthropy committee and president of Capital Market Risk Advisers, expected the final tally to be just shy of $1 million, "which is pretty remarkable when you consider we pulled this event together in about three months." Some 650 people attended, including New York Senator Hillary Rodham Clinton, who received the first annual 100 Women in Hedge Funds' Effecting Change Award. Sandra Manzke, founder of Tremont Advisers, received the groups' first 100 Women in Hedge Funds' Leadership Award. In addition to the Clinton Group, other committee members included Tudor Investments, Amaranth Advisors LLC, Gartmore, Horizon Cash, Susquehanna International, Tremont Advisers, Zurich Capital Markets, Barclays Capital, Citadel Group Foundation, DKR, Fairfield Greenwich Group, Morgan Stanley and Olympius Capital. (December 5, 2002) 100 Women in Hedge Funds’ 1st gala event According to Leslie Rahl, chair of the philanthropy committee and president of Capital Market Risk Advisers, "George Hall, president and founder of Clinton Group, has contributed so generously to the event that 100 cents on every dollar raised goes to breast cancer research. We met with the head of the breast cancer center and the head of oncology at NYU last night to learn more about the program. And it’s not only a great program, and they’re not only interested in the funds we’ll be raising, but they have questions about how women want to be served and educated regarding breast cancer and its treatment." In addition, the first annual 100 Women in Hedge Funds’ Effecting Change Award, will be presented to Senator Hillary Rodham Clinton for her commitment to women’s health care, and the first 100 Women in Hedge Funds’ Leadership Award will go to Sandra Manzke, founder of Tremont Advisers. To date, the 100 Women in Hedge Funds has commitments in excess of $500,000 and some 400 dinner attendees. There are no capacity restraints, and the group is still actively welcoming participants. "In addition to everything else, it’s an evening that promises to be fun," said Rahl. (November 14, 2002)   IRC Surveys Industry on Transparency and Valuation Practices NEW YORK — Members of the International Association of Financial Engineers’ Investor Risk Committee are conducting surveys in preparation for a January meeting with regulators, the results of which will be discussed at its upcoming meeting. The steering committee of the IRC is now circulating surveys on risk transparency and valuation practices to be filled out by hedge fund managers, hedge funds of funds firms, and other investors. The survey was created in response to the issues and developments at Beacon Hill with its mortgage-backed securities fund that had such stunning losses in such a short period of time. While some of the basic questions surrounding transparency may be the same, each survey is tailored to get each industry participant’s viewpoint. Hedge fund managers are asked about what types of information investors ask for in risk transparency reporting and what types of transparency they currently supply to investors and how often. For funds of funds, the questionnaire asks them to rank the usefulness of specific types of risk information such as Value at Risk, position level transparency and stress test results. Meanwhile, investors are asked whether hedge fund managers disclose the details of their valuation policies. Organizations such as the Alternative Investment Management Association and 100 Women in Hedge Funds are distributing the surveys among their membership and encouraging them to attend the Dec. 10 meeting of the IRC in Boston. The meeting corresponds with the Riskinvest 2002 conference. The IAFE is allowing conference delegates to attend free. At the meeting, officials plan to discuss the results of the survey and the first draft of the reporting requirements for hedge funds as divided up by strategy, said Leslie Rahl, who is the U.S. chair of the IRC. (November 25, 2002)   Hedge fund organisation wants best practice, not regulation Senior figures from the hedge fund industry have indicated that they want to resolve investors' demands for transparency by coming up with a set of industry best practice guidelines rather than subject it to outside regulation. Members of the International Association of Financial Engineers' investor risk committee, which is made up of senior professionals from the hedge fund industry, insist that investors will not be any better off with full disclosure of hedge fund dealings. The industry has been under pressure to reveal clearer information to its investors for years. But the issue has come to a head in the past few months as the US Securities and Exchange Commission has started exploring whether it should craft new rules to demand better transparency from hedge funds. The SEC is awaiting responses from hedge fund managers to a detailed questionnaire about their business practices. But they are firmly against the idea that hedge funds should have to disclose details about each security they hold and what they paid for it - known as position transparency. Instead, they believe that hedge funds should simply lay out broader-based information about the nature of their most important exposures - known as exposure transparency. Leslie Rahl, president of CMRA and chairman of the committee, says: "For many people the ability to digest this kind of information may be beyond them." Exposure transparency would be designed to give investors an idea of a fund's risk profile. It would include information such as the top 10 holdings of a long/short fund, or credit exposure details as well as option and volatility risk in a convertible bond fund. The Financial Services Authority is conducting a similar process in the UK and responses to its questionnaire to hedge fund managers are expected by mid-November. (October 9,  2002)   Leslie Rahl: different perspectives on hedge fund transparency The increased focus on hedge fund risk transparency is part of the natural evolution towards institutionalisation that is occurring in the hedge fund world. As the investor base for hedge funds expands beyond its traditional core of high net worth individuals to include plan sponsors, endowments, and foundations, the needs of investors are changing. Although, institutional investors are accustomed to having 100 per cent access to the securities used by their traditional managers and to having these positions independently controlled by their custodian, the question of whether an institutional investor really needs position - level transparency remains an active topic of debate. While institutional investors say they want and need position level risk transparency from the hedge funds and funds of funds in which they invest, few are equipped to effectively deal with this type of transparency. A two-inch thick report of positions is of limited value: yes, it is 'transparency', but it is not helpful. So where does this leave us? Managers are frequently unwilling to provide position-level transparency and investors usually do not have the resources to interpret it. Therefore, what is needed is 'risk translucency', where a standard set of risk factors can provide investors with a meaningful snapshot of a hedge fund's risk. Risk translucency is not a list of positions but is rather a consistent, aggregatable 'risk profile' that is, in most cases, the implicit goal of investors. The Investor Risk Committee (IRC), which I chair, has published two reports on hedge fund disclosure. IRC members agreed that reporting summary risk, return, and position information can be a sufficient alternative to full position disclosure. Such summary information should be evaluated on four dimensions: content, granularity, frequency, and delay.  • Content The quality and sufficiency of coverage of the manager's activities. This dimension covers information about the risk, return, and positions on both an actual and a stress-tested basis.  • Granularity Granularity describes the level of detail. Examples are NAV disclosure, disclosure of risk factors (APT [11, VaR [2], etc.), disclosure of tracking error, or other risk and return measures at the portfolio level, by region, by asset class, by duration, by significant holdings, etc.  • Frequency Frequency describes how often the disclosure is made. High-turnover trading strategies may require more frequent disclosure than private or distressed-debt investment funds where monthly or quarterly disclosure is more appropriate.  • Delay Delay describes how much of a lag occurs between when the fund is in a certain condition and when that fact is disclosed to investors. A fund might agree to full or summary position disclosure, but only after the positions are no longer held. IRC members also agreed that detailed reporting is not a substitute for initial and ongoing due diligence reviews, onsite visits, and an appropriate dialogue between investors and managers. While many hedge funds and hedge fund investors have initially equated the need for transparency with a need for full position exposure, they are beginning to rethink what type of transparency they really need: many have concluded that risk translucency is a more appropriate, and more desirable goal (for more information, see www.iafe.org). (October 2002)   CMRA’s Rahl cool on hedge fund position-level transparency Complete position-level transparency could prove detrimental to the development of the unregulated hedge fund industry, according to Leslie Rahl, president of New York-based consultancy Capital Markets Risk Advisors (CMRA) and author of a new book on the subject. “I believe, more and more, that position-level transparency can do more harm than good,” Rahl told RiskNews. The reason: investors are largely incapable of processing position-level information in a meaningful way. “With some funds, it is difficult to put their positions through a risk management system, for example, merger arbitrage funds that use off-balance sheet synthetic puts based on event risk,” Rahl added. Rahl is chair of the investor risk committee of the International Association of Financial Engineers (IAFE) committee on hedge fund transparency, and has campaigned for more transparency in the hedge fund business for years. But research into her forthcoming book, Hedge fund transparency: Unravelling the complex and controversial debate, led her to the slightly surprising conclusion that full position transparency could lead to more, rather than less, confusion for investors. But she is still a firm advocate of investors being given more access to information. “But we need to translate that into a hedge fund reality,” Rahl said. Rahl also believes the current nomenclature for hedge funds is confusing to the average investor. She believes funds should be classed in accordance with their strategy type, rather than the asset class they cover. Risk profiles can then be developed by strategy type and templates created for comparisons on a strategy-by-strategy basis. Research for her book included interviews with leading investors, hedge funds and fund-of-fund participants. Her book, due for publication by Risk Books in November, contains a number of perspectives written by leading proponents in the investment industry. These include Mark Anson at Californian state employees pension fund Calpers, Paul Platkin, who runs General Motors Pension Plan, Ron Mock from the Ontario Teachers Pension Plan and Myron Scholes at Oak Hill Capital, among others. (October 31, 2002)   CMRA Settles on a Customized Approach NEW YORK — Capital Market Risk Advisors has expanded the services it offers in the funds of funds arena to give clients more customized assistance in the creation of funds of funds portfolios. Clients can now choose from services such as portfolio construction, manager selection, risk monitoring or ongoing due diligence, said Leslie Rahl, president of CMRA. The firm has been working with a number of institutional investors, specifically assisting in hedge fund due diligence. Ms. Rahl has observed a real need in the area of due diligence and manager selection, especially when institutional investors are dealing with more complex hedge fund strategies. A lot of the firm's work has been project-oriented with investment banking, investment management, hedge fund, fund of funds and institutional investor clientele all taking an interest in the firm's risk management techniques. The firm's clients have included: California Public Employees' Retirement System; Ontario Teachers' Pension Plan Board; Credit Lyonnais and Dresdner Bank, according to the firm's web site. In 10 years, the firm has amassed more than 200 clients on six continents, Ms. Rahl said. Ms. Rahl also has a forthcoming book on transparency. "Hedge Fund Transparency: Unraveling the Complex and Controversial Debate" will be published in November. The book interviews 26 practitioners offering both the hedge fund and investor point of view of transparency. A portion of the book's revenues will be donated to the Investor Risk Committee of the International Association of Financial Engineers, which Ms. Rahl chairs. The group has been working to establish a standard for hedge fund transparency. (October 16, 2002)   AIMA Releases Fund of Funds Guidebook LONDON-The Alternative Investment Management Association Ltd. has released the results of the research on hedge fund of funds it commissioned in 2001, complete with commentary from practitioners. A 96-page book, "A Guide to Fund of Hedge Funds Management and Investment," covers a broad range of topics including risk management, transparency, hedge fund selection and benchmarking, liquidity, fees and due diligence. Capital Market Research Advisors, New York conducted the research, parts of which have been released throughout the year. CMRA coordinated and co-edited the guide that includes three comprehensive surveys of institutional investors, hedge funds and hedge funds of funds completed in the last year. Findings of one survey released in April show a level of concern on the part of those in the hedge fund industry and also a level of uncertainty over the accuracy of risk measurement. The area of risk management is one to which the hedge fund managers surveyed are committed. A total of 61% of both individual hedge funds and funds of funds surveyed include risk limits in their investment guidelines. Of that same group, 79% said they had written risk management policies and procedures, while only 56% of investors do. In January, the results of the survey on transparency were released. Those findings showed a conflicted industry where 86% of investors indicated that transparency was an issue in the selection of hedge funds and funds of funds, while only 69% of those investors said they were satisfied with the transparency in the industry. On the other hand, 29% of the investors surveyed said they had requests for information turned down by hedge funds and funds of funds. According to that transparency survey summary, a significant gap existed between what hedge funds claimed to provide and what investors said they received. Of investors surveyed, only 13% said they had received full position detail and only 15% said they gotten risk reports with risk factors from their hedge fund managers. Conversely, 57% of hedge funds said they provided full position reports, and 37% said they sent out risk reports with risk factors. (October 17, 2002)