CMRA in the Press 2002

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)

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)

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)

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)

Monitor Mortgage-Backed Securities, Consultants Say

Investment consultants are warning their clients to proceed with caution into the mortgage-backed securities market these days. They stop short of telling institutional investors to pull money out of the asset class, but some consultants see danger ahead.

The concern is that low short-term interest rates have prompted people to refinance their home loans at lower rates. When homeowners refinance, they prepay their existing loan. This takes the homeowner's money out of the manager's portfolio. It becomes a problem for investors when that prepayment happens more quickly or more slowly than expected. Expectations change when the overall interest rate changes.

"Too many dollars are chasing after that stuff right now," says an investment consultant who wishes to remain anonymous. "My sense is the fuse is lit and some of these funds are going to blow up."

Consultants have not seen investors putting new money into mortgage-backed securities. They are, however, concerned that managers with a core fixed-income product are putting more of their fixed-income portfolios into mortgage-backed securities. Consultants advise institutions to keep their managers in check, understand their risk and make sure their portfolios are balanced.

But not everyone is leery of the asset class. The risks of mortgage-backed securities are no greater than those of any other asset class that offers above average returns in exchange for an above average complexity of investing, says Leslie Rahl. Rahl is president of Capital Market Risk Advisors in New York. Rahl advises on risk management and portfolio construction.

Rahl says it all comes down to the skill of the manager. Indeed, consultants recommend investors make sure they are invested with top-tier mortgage backed securities managers. Some of those include, PIMCO, Clinton Group, BlackRock and Western Asset , Rahl says.

Even if a manager has a good reputation, investors should keep a strong eye out for that manager's level of risk management and stress-testing program in place, Rahl notes. "Investors want to understand how sensitive managers are to prepayment assumptions, how they're valuing their positions and what kind of stress-testing they've done," she suggests.
(October 23, 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)

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)

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)

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)

Industry Experts Discuss Transparency Challenges, Regulation

As the SEC and Treasury Dept. continue to pass or ponder regulations affecting how hedge funds handle transparency, industry insiders are continuing their crusade of self-regulation, a group of investment professionals said at a recent industry meeting.

The Investor Risk Committee of industry group the International Association of Financial Engineers has issued two sets of guidelines on the subject and has held three working sessions, in which the committee divided into strategy-specific subcommittees. The group aims to release a comprehensive set of guidelines by the second quarter of next year. But committee members agreed that taking transparency matters into their own hands was a necessary step in attracting new investors and avoiding further federal regulation.

Leslie Rahl, president of risk management consultancy Capital Market Risk Advisors and another member of the steering committee, said one of the main issues facing hedge funds is not only what type of information to present to investors, but how to present it. Rahl decried "data dumps," or deluging investors with reams of meaningless data on minor changes in single securities, for example.

"For many [investors], I'm not even sure that if they had the information, they could analyze it," said Rahl. "They need meaningful tools to analyze the information they have."

Further complicating the issue is the fact that hedge funds come in many flavors, and transparency solutions that work for long-short equity funds, for example, won't work for convertible arbitrage-the "one size fits nobody" conundrum, as Rahl put it.

Commercially available risk management templates are also impractical for the same reason, Rahl also pointed out.

Rahl also stressed the importance of qualitative due diligence-"eyeball to eyeball meetings"-as a key component of risk management. Rahl said this simple step is just as important as quantitative research and could have played a role in the prevention of hedge fund blowups such as the Long Term Capital Management fiasco of 1998 that tainted the industry's reputation.

"I think if investors had asked some simple questions-‘What happens if we have a credit crisis and haircuts increase? What happens if you stop getting favorable rates?'-they might not have invested."

While in agreement that investor disclosure needs to be a component of the industry, the IRC members said increased government regulation would not assist that process.

Said Rahl, "Seeing how difficult it is to deal with transparency [even] with all our experience, we think it would be even more difficult to deal with if you were removed from it."
(September 25, 2002)

IRC: Transparency Key to Self-Regulation of Hedge Fund Industry

Funds of Funds

Many institutional investors cope with these and other complexities of hedge fund investing by choosing the fund of funds format, where due diligence and portfolio management are handled by a third party hired by the investor.

But while a fund of funds may assuage the immediate concerns investors may have in the realms of due diligence and risk management, the growing popularity of multi-manager funds in no way ensures that better or even adequate transparency and risk-reporting practices will prevail for the wider industry, according to some IRC members.

"With funds of funds, it's a case of one size fits none," said Leslie Rahl, an IRC member and principal at New York-based Capital Market Risk Advisors Inc., a consulting firm specializing in derivatives, financial forensics, risk oversight, financial engineering, and capital markets strategies.

Looking at fund data and performance information is only part of the process when making a hedge fund investment, Ms. Rahl said. "It's only one-third of the pie," she said.

Another large part of the equation is due diligence. When done correctly, this can offer an investor insights into the risks associated with making an allocation from the standpoint of the overall portfolio, according to Ms. Rahl.

Some individual members of the IRC expressed concerns that the SEC may be inching towards greater regulation of the hedge fund industry, paralleling a move by regulators to provide additional oversight of the derivatives markets during their growth spurt in the 1980s.

Still, the same members who advocate self-regulation of hedge fund industry through evolutionary changes in "sound practices" and risk management were gentle in their critique of current efforts by regulators.

"The sense is that the SEC is asking questions and gathering information. It's hard to be critical of that, when it's the same thing we've been doing for more than two years," one IRC member said.
(September 25, 2002)

Experts Push For Limited Hedge Fund Transparency

The International Association Of Financial Engineers' Investor Risk Committee says hedge fund managers are a long way off from offering position transparency. Knowing a manager's positions, however, is not necessarily the best solution to the transparency problem.

The committee suggests that managers adopt a policy of exposure transparency. That would protect a manager's positions, while revealing the manager's risk levels to the cautious investor.

The IAFE is a professional society based in New York that studies complex financial issues. On the Investor Risk Committee is Leslie Rahl. Rahl is president of Capital Market Risk Advisors. The New York-based firm specializes in risk-management consulting.

The committee is charged with finding the optimum level of disclosure between hedge funds and their investors. As part of that, it's working to develop a best practices guide. It hopes all managers will adopt its best practices when the committee completes the guide sometime after the second quarter of next year. If this guide is widely accepted in the industry by managers, investors and regulators, it may help diffuse the need for widespread regulation, Rahl suggests.

One of the committee's most pressing disclosure issues is transparency. "And with so many different and complex hedge fund strategies, it's very hard for investors to determine their manager's risk", Rahl says.
(September 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 (PDF)
(Summer, 2002)

NAV in Name Only

However inconsistency in reporting NAV complicates the process. In July, New York-based Capital Market Risk Advisors, Inc. released a survey that revealed some inconsistencies in reporting asset values. The firm canvassed 60 institutions representing $2 trillion in assets and found little consistency in how assets are valued in hedge funds, mutual funds or traditional money managers' portfolios. Those inconsistencies translate into problems for investors attempting to compare performance and manage portfolio risk, said Leslie Rahl, president of Capital Market Risk Advisors.
(July 2002)

IAFE Making Progress on Transparency Standards

"We are already making progress by talking to each other," said Ms. Rahl, who is also founder and president of Capital Market Risk Advisors, a risk management consulting firm.

The real dilemma at this point is that what institutional investors want (i.e. full transparency) is not possible, Rahl said. In reality, investors will need to learn to rely on risk profiles, rather than detailed holding information from hedge fund managers, according to the group.

"When we are talking about the transparency process, it's not only getting the information but it's understanding the quality of the information." Investors need to know whether a manager is marking a portfolio to a model or marking it to market value. And the difference can be huge according to research conducted by Capital Market Risk Advisors.
(July 31, 2002)

Capital Market Risk Advisors ("CMRA"), the preeminent financial advisory firm specializing in risk management, due diligence, portfolio construction and risk attribution, led by former Citibank Derivatives Group head Leslie Rahl, issued a report completed on July 18th commissioned by Gotham Partners which analyzes the interest-rate and liquidity risks of Federal Agricultural Mortgage Corp. ("Farmer Mac").

The study's findings include:

• Given Farmer Mac's limited disclosure about its assets, liabilities, and derivative portfolio, it is impossible to determine the full extent of Farmer Mac's exposure to interest rate risk;
• The company's MVE (Market Value of Equity) test is an inadequate measure of interest-rate risk;
• The data from Farmer Mac's MVE test shows that Farmer Mac has a negatively convex portfolio - in every portfolio shift, up or down, the portfolio experiences a loss;
• Farmer Mac's reliance on short-term funding creates significant liquidity risks. Management's statements indicate that the company does not hedge this risk.

In addition, CMRA demonstrates by use of simple example that Farmer Mac's MVE test -- Farmer Mac's primary test of its interest-rate risk which assumes parallel shifts in the yield curve -- is not the most stressful interest rate shock test despite management's public statements to the contrary.

The July 18th CMRA report was commissioned by Gotham Partners in order to obtain an objective analysis of Farmer Mac's portfolio risks based on the company's public filings and statements made by management. CMRA was asked to comment on the disclosure of interest-rate risk found in Farmer Mac's 10-K and 10-Q SEC filings, and to comment on the statements made by Farmer Mac management during the conference call on May 31, 2002 regarding Farmer Mac's match funding. More specifically, CMRA reviewed the company's comments regarding disclosure of the impact on Market Value of Equity (MVE) of "non-parallel interest-rate shock tests," which include the CFO's statement that: "The instantaneous parallel shock test is the most conservative test you can do. It is the most severe, and we report it because it shows that we can sustain even the most severe and unrealistic scenarios." CMRA limited its fact finding to the documents referenced above, and, therefore, its conclusions are subject to change if more information becomes available.

The-report also details other risks to which Farmer Mac is exposed including spread, volatility, and prepayment risk. In the report, CMRA found that Farmer Mac's disclosure regarding these risks is inadequate, making it impossible for outside investors and analysts to assess the degree of these risks to which Farmer Mac is exposed.
(July 25, 2002)

The investor risk committee of the International Association of Financial Engineers is continuing to work on how to achieve an optimum level of disclosure between hedge funds and managers. Leslie Rahl of Capital Risk Advisors, who is on this committee, replied to a question as to whether hedge fund regulation is going to increase. "Not if we do our job right," she said. "But if we don't, regulators might feel compelled to step in."
(July 2002)

HEDGE FUND RISK MANAGEMENT

The Alternative Investment Management Association (AIMA) commissioned Capital Market Risk Advisors, Inc. (CMRA) to conduct AIMAs first comprehensive review of fund of funds investing due for release by Summer 2002. As part of this project, a series of surveys were issued to institutional investors, fund of funds managers and hedge fund managers to question them on various issues, such as risk management and transparency.

The analysis of the survey responses is ongoing although the results will represent only one thrust of the research. A summary of the results on transparency was released in January 2002 and we are releasing this summary on risk management due to the importance of this issue to many funds and investors.

Risk Management – Summary

• 14% of individual hedge funds and 19% of funds of funds have had "risk budgets" assigned by investors, while 27% of investors say they have assigned "risk budgets" to their funds and 7% are studying the idea.
• Only 43% of funds of funds that rely on managers to track their risk vs. budget feel they understand the details of the risk calculations performed by each of their managers and calibrate and aggregate risk across managers.
• 61% of both individual hedge funds and funds of funds include risk limits in their investment guidelines.
• 79% of both individual hedge funds and funds of funds have written risk management policies and procedures, but only 56% of investors do.
• 59% of funds of funds, 54% of individual hedge funds, but only 4% of investors have their risk management practices and procedures independently reviewed.
• 57% of funds of funds claim to compute VAR for their overall fund of funds but in some cases it is unclear on how they do it since they don't get position level data.
• 89% of funds of funds indicate that they provide formal NAV monthly, 7% quarterly and 4% biweekly
• Leverage is defined in a variety of ways by funds of funds and by individual hedge funds. Funds of funds are most likely to use gross balance sheet asset to equity while most hedge funds use other measures such as 10 years swap equivalent, gross balance sheet leverage, or margin and equity ratio.

We plan to release the full fund of funds paper during the summer of 2002 that will cover:

• Diversification
• Comparison Bias
• The Future of Fund of Funds
• Advantages & disadvantages of fund of funds vs. individual hedge fund investing
• Transparency
• Portfolio constitution
• Performance and risk attribution
• Liquidity
• Service providers
• Fees

(June 2002)

Alternatives Survey Finding Transparency Is Key For Investors Concerns

Preliminary findings from a study of funds of funds by Capital Market Risk Advisors (CMRA) in conjunction with the Alternative Investment Management Association show that institutional investors are still nervous about the lack of transparency and the high risk involved in investing. The study's early findings also show that fund managers and fund of fund managers are hesitant to embrace the idea of best practices or reporting standards. The CMRA study is scheduled for completion and release in August of 2002.

"There is a tug of war going on," said Leslie Rahl, president of CMRA, who shared these preliminary results during a panel on transparency and disclosure at the 9th Annual Hedge Fund Forum held in New York this week. Managers in the alternative investing world are typically anti-bureaucracy and anti-authority, she added. And investors are inclined to demand adherence by managers to "best practices," a full understanding of risk in each fund, and funds with stable infrastructure and investment processes that are not reliant on a single manager.

As a result, funds of funds have been a haven for institutional investors as vehicles that meet their comfort levels for diversification and risk more than direct investments in a handful of hedge funds, said panelists. According to recent research, there are approximately 1,000 funds of funds and 6,000 hedge funds currently in the marketplace, all but about 50 of which have been created since 1980, according to the panelists.

The survey found that investors rank risk diversification the primary reason to invest in a fund of funds, and risk management second. Fund of funds, however, ranked risk management fourth on its list of priorities, a discrepancy that some say could cause problems down the road. "This could mean that investors are putting more reliance on fund of funds for doing risk management than funds of funds are actually doing," said Rahl.

Third-party data research companies may provide the happy medium for investors and fund managers. Marita Wein, senior v.p., operations and information technology and treasurer at The Common Fund, a fund management and investment advisor for nonprofit institutions, agreed that institutions do require transparency, but that the problem is not as dire as it seems. It has $1.5 billion in alternative investments and 75% of the managers it deals with are willing to give up information about their positions to a third party. "You have to do this to be in the institutional market," said Wein. Asset management and advisory firm, Tremont Advisors has partnered with a third-party risk measurement firm, RiskMetrics to co-develop a risk-reporting tool for the industry. "We expect to have 50% of the fund managers we work with up and running with our reporting platform by the end of this year," said Cynthia Nicoll, v.p., director of risk management at Tremont.

The survey also found that 79% of investors rely on detailed conversations with the fund for information and reporting and that 66% rely on detailed position information obtained when performing the initial due diligence. Only 7% of funds of funds had potential investors decline to invest based on lack of transparency. It showed that 63% of funds of funds would find a standard set of "risk factors" very valuable or extremely valuable for portfolio construction and 56% for marketing/client reporting. But 17% of funds of funds reported that they have requested a "risk profiles" report from the hedge funds they invest in and been turned down.

In addition to the fund of funds survey, the Investor Risk Committee (IRC) of the International Association of Financial Engineers (IAFE) is also taking the industry's temperature regarding transparency and disclosure. It has found that summary risk, return and position information is sufficient as opposed to overloading investors with constant data on positions, and that the summary data should be evaluated by content, granularity, frequency and delay. "What does position level detail do when only 60% of funds provide it," questioned Rahl, who is also chair of the IRC. The IRC will begin work this summer to quantitatively create factors by investment style (i.e. convertible arbitrage, equity long/short, etc.) that would allow a risk profile to be attached to a portfolio, said Rahl. "We'll be trying to create any rules of thumb by style."
(June 6, 2002)

Hedge Funds Take First Steps To Attract Pension Dollars

Other firms such as Capital Markets Risk Advisors, a consulting group, act as intermediaries if managers are not willing to disclose their positions directly to RiskMetrics. "We act as a trusted third-party. There are a lot of good reasons for hedge funds to be hesitant to give positions," said Leslie Rahl, president. The final result, is pension plans get more risk information than typical with hedge fund investments without the funds divulging data in a way that could jeopardize their abilities to execute strategies.

The International Association of Financial Engineers established the Investor Risk Committee in 2000, to discuss the level of disclosure between hedge funds and investors. The committee includes hedge funds, funds of funds and institutional investors. "This is an ongoing industry consensus process; we'll probably end up with some kind of recommended risk profile--a best-practice set of risk information," said Rahl, who chairs the committee.
(June 2, 2002)

Review of Risk Budgeting: A New Approach to Investing

Is risk budgeting a risk management technique or a new approach to investing or both? In this three-part, 13-chapter compendium, Leslie Rahl, the editor, and other leading practitioners from the field attempt to suggest that risk budgeting goes beyond the realm of risk management and indeed represents a new approach to investing. In Rahl's own words, the book is "designed to provide a comprehensive assessment of the leading edge thinking on risk budgeting and risk management for institutional investors and plan sponsors."
(Spring 2002)

Operation Information

Although the industry has undertaken work to improve the transparency of hedge portfolios, fund managers' opinions differ over just how transparent funds should be

More work needs to be done to improve hedge fund transparency, even though the industry's trade body has highlighted the fact that, on average, information and the frequency of release is improving.

The issue of understanding how a hedge fund is positioned, or at least its sector weightings, themes and strategy is crucial to investors in both individual hedge funds and funds of funds.

New York-based risk consultancy Capital Market Risk Advisors (CMRA) says there has been at least one unexpected shock-producing movement with a magnitude of 10 standard deviation units each year in at least one market every year over the past decade, with some affecting hedge funds markedly.

But a report by CMRA found only 37% of hedge funds provided investors with insight into their operations through risk reports with risk factors, and only 15% of investors said they had received these.

CMRA research commissioned by the UK's Alternative Investment Management Association (ALMA), which was released at the end of April, found 14% of hedge funds and 19% of funds of funds had 'risk budgets' assigned by investors.

About 60% of funds included risk limits in their investment guidelines and 79% of individual funds and funds of funds had penned risk management policies and procedures.

Perceived impact on hedge funds of position level disclosure

To help investors assess how market-moving events may affect a hedge fund's performance, 57% of hedge funds surveyed provided investors with details of their full position, but only 13% of investors said they had received the information.

CMRA's report found 86% of investors said transparency was an issue when selecting both single manager portfolios and funds of funds.

Investment managers give varying reasons for withholding information on specifics such as stock positions, citing competitive advantage as the key reason.

DEVELOPING INDUSTRY WIDE MEASURES

Leslie Rahl, president of CMRA, says greater transparency for hedge fund investors could be resolved by developing risk profiles that can be aggregated to provide industrywide measures She does not believe full disclosure of all a portfolio's positions is necessarily the way to achieve disclosure.

"If someone provides a complete printout of all their positions, you could call it transparency, but providing it on a disk, for example, which you can slice and dice and analyse, might be better than a five-page print out. A risk report may not explain all the positions, but again may be better," she says.

"If you are an investor who invests in 10 hedge funds and five give you a really complete definite picture (of their positions) but five will not - it is a real dilemma."

Rahl says associations such as Britain's ALMA and the US's IAFE, or risk analyst and data provider firms such as RiskMetrics could be involved in establishing a standardised approach to calculating risk profiles of different hedge funds. The approach and metrics used might differ between fund styles and take a long time to develop and for the industry to agree on, she adds.

Although 69% of respondents to CMRA's were satisfied with the information they received from their hedge funds and funds of funds providers, 29% had requests for further information declined by the product providers.

The information supplied by managers and potential investors seemed at odds, as only 7% of funds of funds providers and 4% of individual hedge fund providers said investors had refused to invest in them due to an inadequate release of information. But the majority - 64% - of investor respondents said they had declined to invest in products due to insufficient transparency.

The CMRA report calls for risk transparency, where a standard set of risk factors can provide investors with a meaningful snapshot of a hedge

fund's risk.' But it adds that managers were often reluctant to provide position transparency and investors lack the resources to interpret what is released.

The reason for this, says Rahl, is that managers believe, sometimes falsely, their competitive edge may be removed by providing data on positions. On other occasions, she adds, managers may see requests for data from uninformed investors as irritating.

"With some investors, they ask for data without knowing what they will do with the information, and a lot of hedge fund managers come from the trading culture. When someone you recognise does not have a clue what they are going to do with the data that comes to you and asks if they may see it, it is more of a nuisance."

"When investors can better articulate what they are going to do with the data, or why they need it, I think there will be more compromise reached between the groups."
(May 2002)

Leslie Rahl, who runs Capital Market Risk Advisors, says she's not a big believer in rigid rules governing derivatives practices. "Those only encourage creative financial engineers to work around them," she says.
(May 20, 2002)

Buffett Unit's Exodus From Derivatives Raises Questions

"There is no doubt that the less liquid and more exotic the derivatives position, the more subjective the estimate of value is. Clearly, that was an issue at Enron in some of their positions," said Leslie Rahl, president of Capital Market Risk Advisors Inc., a New York derivatives consulting firm.

She said derivatives is "a business you either have to be in with commitment, and willing to take the risks in return for the rewards that can be repeated and willing to grow it, or it's probably not worth the effort to do it in a small way, because you need a tremendous amount of infrastructure, whether you have one deal or thousands."
(May 10, 2002)

Review of Risk Budgeting: A New Approach to Investing

Is risk budgeting a risk management technique or a new approach to investing or both? In this three-part, 13-chapter compendium, Leslie Rahl, the editor, and other leading practitioners from the field attempt to suggest that risk budgeting goes beyond the realm of risk management and indeed represents a new approach to investing. In Rahl's own words, the book is "designed to provide a comprehensive assessment of the leading edge thinking on risk budgeting and risk management for institutional investors and plan sponsors." Part I of the book provides an overview, Part II focuses on understanding risk budgeting, and Part III presents case studies.

In the overview, Rahl, a veteran in risk management, traces out the history of risk management and shows that risk budgeting is a natural step toward the evolution of the investment process. She points out that the major difference between asset allocation and risk allocation (risk budgeting) is that the former process emphasizes return, out-performance, and P&L flows whereas the latter emphasizes returns in addition to volatility and correlation.
(Spring 2002)

AIMA Releases Preliminary Funds of Funds Risk Management Survey Results

NEW YORK -The survey the Alternative Investment Management Association commissioned Capital Market Risk Advisors to conduct on funds of funds is close to completion as the results of the risk management portion of the survey are released.

Individual hedge funds and investors were interviewed, in addition to hedge funds of funds managers for the survey. The findings 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.

Risk management is an area in which hedge fund officials 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.

However, risk management is only as good as the information you have. Only 43% of funds of funds that say they rely on managers to track their risk vs. budgeted risk feel they understand the details of the underlying risk calculations from each manager. These funds of funds then calibrate and aggregate risk across managers using these undefined figures.

Over half (57%) of funds of funds also say they compute Value at Risk for their overall funds of funds, but in some cases it is unclear on how they do it since they don't get position level data from the individual managers, according to the AIMA/CMRA findings.

On the topic of risk budgeting, respondents were less enthusiastic. A total of 14% of individual hedge funds and 19% of funds of funds have had investors assign risk budgets. By comparison, 27% of investors say they have assigned risk budgets, while another 7% say they are studying the idea.

A factor in risk budgets, leverage is defined in a variety of ways by funds of funds and individual hedge funds, according to CMRA. Funds of funds (69%) are most likely to calculate leverage using gross balance sheet assets to equity, while most individual hedge funds use other measures such as 10-years swap equivalent, gross balance sheet leverage or a margin and equity ratio.

This is the second round of survey results AIMA has released. A full research report on funds of funds will be issued this summer. Results of the transparency survey were released in January. The full set of research will cover a number of issues including: diversification; comparison bias; advantages and disadvantages of fund of funds vs. individual hedge fund investing; portfolio constitution and liquidity.
(April 29, 2002)

Few investors set risk budgets

Only 14% of hedge funds and 19% of funds of funds have had "risk budgets" assigned by investors, according to a risk management summary released by Alternative Investment Management Association (Aima).

Aima commissioned Capital Market Risk Advisors to conduct its first review of fund of funds investing due for release in the summer 2002. As part of this, a series of surveys was issued to investors, fund of funds and hedge funds to question them on issues such as risk management. The first one on transparency is already out.
(April 29, 2002)

A survey conducted by Capital Market Risk Advisors and commissioned by the Alternative Investment Management Association shows hedge managers and investors are starting to use sophisticated tools such as risk budgets. "Progress is being made toward improved risk management but it is not universal," says Leslie Rahl of CMRA; "There are still many people who have a lot of work to do."

The study, part of a larger research project on fund of fund investing that is to be released this summer, surveyed institutional investors, fund of funds managers and hedge funds. It found that 14% of hedge funds and 19% of funds of funds have risk budgets assigned by investors. Among investors, 27% say they have assigned risk budgets to their funds and 7% are studying the idea.

"As more investors assign risk budgets, it will have a significant impact on funds, because managers will have to be able to determine whether they are staying within the risk budget," said Rahl. A risk budget, consisting of parameters that define risk tolerance, is a different way of thinking about asset allocation, she explained. An investor decides how much risk or Value-at-Risk or tracking error to allocate. "So increasingly you see sophisticated institutional investors telling a fund that they don't want a V AR of more than a certain number," Rahl observed.

Almost two-thirds of hedge funds and funds of funds include risk limits in their investment guidelines, the study shows. "That is really good news," says Rahl. "But it also means that 39% have yet to tackle this matter." Also on the needs-more-work list: only 43% of funds of funds that rely on managers to track their risk feel they understand the details of the risk calculations and calibrate risk across managers.

Other highlights from the survey:

• 79% of hedge managers and funds of funds have written risk management policies and procedures, but only 56% of investors do.
• 59% of funds of funds and 54% of individual funds, but only 4% of investors, have independently reviewed risk management procedures.
• 57% of funds of funds claim to compute V AR but in some cases it is not clear how they do it since they don't get position data from underlying managers.
• Leverage is defined in a variety of ways by funds of funds and individual funds.

The AIMA-CMRA project will report on a wide range of other topics, including the future of funds of funds, advantages and disadvantages of single funds versus funds of funds, comparison bias, diversification, portfolio constitution and fees.
(April 29, 2002)

"Risk is not bad. What is bad is risk that is mispriced, mismanaged, misunderstood, or unintended." - Leslie Rahl
(April 2002)

How Markets Cope When a Big Player Goes Bust

...In the rough-and-tumble of real-life trading, things can quickly get messy. Clearly the interests of the solvent and bankrupt parties are opposite when it comes to valuing contracts for early termination, and not surprisingly it can become contentious. Leslie Rahl, president and founder of Capital Market Risk Advisors, a risk consultancy, said that "there's almost always a difference of opinion, breakage between the value that someone thinks they're going to receive and what they do [receive]. Even if you have two [originally] matched trades you're going to take them off at different prices." In other words, what looked like two sets of perfectly offsetting positions-a perfect hedge-may turn out not to offset once quotes have been obtained and the contracts terminated.

While the quote method would seem to be objective, depending on the liquidity of the market the results can still be dubious. "I've seen bunched quotes, three bunched together at one end, and two at the other, as though there's a significant difference of opinion among dealers." As a result, even after dropping the outliers, "you can still get a mishmash,," Ms. Rahl said...
(Spring 2002)

Study Finds Merger Arbitrage Funds Drift Outside Area of Expertise

The dearth of merger & acquisition deals has forced managers to hold cash or make bets on stocks outside their area of expertise, according to a survey conducted by hedge fund consultants Capital Market Risk Advisors, reports Reuters. The survey concluded that risk- adjusted returns of merger arbitrage funds had actually been much lower because "merger arbitrage managers appear to have been punished for drifting as the equity market precipitously declined. " Industry executives consider style drifting a major market risk among merger arbitrage hedge funds and possibly a reason to fire a manager .
(February 20, 2002)

Survey finds merger arbitrage hedge funds drifting

LONDON, Feb 19 (Reuters) -The mergers and acquisitions drought is hitting hedge funds that speculate on takeovers hard, reducing risk-adjusted returns and forcing them to hold cash or make bets on stocks outside their area of expertise, according to a survey released on Tuesday.

Style-drifting, or "hedge fund managers flip-flopping out of their area of expertise and skill set" as one industry executive put it, is considered a major market risk among merger arbitrage hedge funds and a reason to fire a manager according to some.

The survey by hedge fund consultants Capital Market Risk Advisors (CMRA), presented at a London industry conference, concluded that risk-adjusted returns of merger arbitrage funds had actually been much lower because "merger arbitrage managers appear to have been punished for drifting as the equity market precipitously declined," according to the report.

Merger arbitrage funds speculate on the outcome of proposed company mergers, making bets against the target company if they believe the deal will fall through or buying its shares if they think the merger will be completed.

CMRA said the merger arbitrage strategy in general offered an attractive risk-return performance thanks to the modest returns these managers generate and their low volatility.

Based on performance data from Hedge Fund Research, merger arbitrage strategy generated an annualised gross return of 10.8 percent in the period between January 1997 and October 2001, mainly driven by higher returns on smaller deals which generated the highest returns, CMRA said.

That resulted in a Sharpe ratio of one percent, CMRA said.

The Sharpe ratio is a major indicator of performance for the hedge fund industry and shows the level of return generated for every unit of risk, or volatility, taken. Any Sharpe ratio below one percent is considered weak performance.

Its calculation is based on the average return minus the benchmark or the risk-free interest rate in the market divided by standard deviation, or the percentage change in returns over time.

The Sharpe ratio was even higher at 1.6 percent according to an analysis of major merger arbitrage hedge fund indices by Zurich Hedge Fund Indices between January 1998 and December 2000.

But when a conservative estimate of transaction costs and hedge fund fees are taken into account, the CMRA said the net return on merger arbitrage strategies was just 6.8 percent for the period between January 1997 and October 2001, resulting in a poor Sharpe ratio of only 0.3 percent.

"We scratched our collective heads --how could we reconcile the 1.6 Sharpe ratio actually achieved and the 0.3 percent Sharpe ratio of the pure merger arbitrage strategy which represents its long-term performance?" CMRA analysts said.

'Our broad conclusion is that the majority of managers have achieved their returns by "drifting" and taking on significant equity market exposure. They did not follow the pure market-neutral merger arbitrage strategy."

CMRA's survey found high correlation between pure merger arbitrage strategies and the Standard& Poor Index between December 1996 and March 2000 but low correlation beginning from October 2000.

Zooming in on the financial market crisis period of September 2001, the survey said the pure merger arbitrage strategy delivered a positive return of 2.5 percent while the Hedge Fund Research merger arbitrage index fell three percent and the S&P fell 8.2 percent.

"Clearly, managers were playing the equity market significantly more than they were playing the "pure" strategy," CMRA said.
(February 19, 2002)

Transparency Remains Key Issue for Investors

According to an international survey commissioned by the Alternative Investment Management Association and carried out by Capital Market Risk Advisors, a lack of transparency is still seen as a major concern for investors when selecting hedge funds and hedge fund of funds. The WSJI reports the survey also indicates there is a discrepancy between the information investors say they receive and the amount funds say they provide. Transparency was a key issue for selecting hedge funds and fund of funds for 86% of the investors surveyed, while over two thirds have declined to invest on those grounds.
(February 4, 2002)

The great risk debate: Basel committee proposals and a tough business climate push operational risk to the fore. The question remains, how to manage it best.

"I question the value add of a quantified approach in many situations," says Leslie Rahl, president of Capital Market Risk Advisors, in New York City.

"It's a significant undertaking to collect historical data to work with. And because no two institutions are run in the same way, how useful is comparative data?" Rahl, a former Citibank executive who headed the bank's North America derivative group, was not alone in questioning the value of quants. She pointed out that many organizations have no database of internal loss events, much less access to the burgeoning collections of industry data, needed to develop norms.

Instead, she sees operational risk as something that most in the industry have managed fairly effectively, although, obviously, there have been high profile anomalies leading to significant loss.

Except for the human factor of greed (the work of "a few bad apples," as she puts it), Rahl believes that problems with operational weaknesses generally creep in with processing "unusual" transactions.

"Whenever you're fitting a square peg into a round hole, creating special applications or manual processes to address something the standard process can't, problems crop up," she notes. Rahl thinks that "fairly mundane yet useful" indicators, such as fail rates, will point out an area of vulnerability and allow a bank to act in its own best interests and prevent many potentially troublesome situations.

Rahl thinks one complicating factor, at least in the U.S. is managing a constant stream of change. Whether M&A activity or anew venture, anything that changes workflow creates vulnerabilities.

"This makes it tough to deploy systematic forms of measurement and containment," she says.
(February 2, 2002)

Survey Shows Perception and Reality Not So Transparent

NEW YORK (HedgeWorld.com)-Perception and reality really are different when it comes to transparency, according to the results of the Capital Market Risk Advisors Inc.'s survey commissioned by the Alternative Investment Management Association.

Only 7% of hedge funds of funds and 4% of hedge funds said they've had potential investors decline to invest due to a lack of transparency, 64% of investors claim they have declined to invest because of transparency issues, according to the survey.

The survey of more than 100 hedge funds, funds of funds, and investors, is only part of the groups project with a book of research scheduled for release later this year, said Leslie Rahl, president of CMRA. Topics to be covered will include: diversification; comparison bias; the future of funds of funds; advantages and disadvantages; hedge funds and funds of funds transparency; portfolio construction; performance attribution; liquidity; service providers; and fees.

In the meantime, CMRA released the transparency survey results on its web site
(January 29, 2002)

Bermuda-based funds of funds manager Investor Select Advisors has retained Measurisk and Capital Markets Risk Advisors to provide daily risk reporting to institutional clients. "It has become crucially important to a number of institutional clients to have daily transparency of their underlying hedge fund positions," says John Trammell, who was named president and appointed to ISA's board of directors in November. He is spearheading the firm's risk management services initiative.

Measurisk essentially operates as a third party source, collecting confidential portfolio information from hedge fund managers that it then analyzes to generate a host of risk measurement statistics. The World Bank, Blackstone Alternative Asset Management, the California Public Employees' Retirement System and other alternatives firms use the service for internal risk management purposes, as complete daily transparency typically provides more data than institutions are able to absorb on a daily basis.

"CMRA applies additional fundamental factors to data supplied by Measurisk to better inform institutional clients of the risk inherent in the underlying fund of funds portfolio," Trammell said. The factor analysis risk program will illustrate daily risk in a much simpler format.

Investor Select manages over $250 million in funds of funds strategies and customized accounts.
(January 14, 2002)

The Alternative Investment Management Association and Capital Market Risk Advisors have released results of a transparency survey.

Among the findings are:

* Only 7% of fund of funds and 4% of individual hedge funds indicated they have had potential investors decline to invest because of lack of transparency but 64% of investors claim they have declined to invest.

* 86% of investors say transparency is an issue in selecting funds.

* 69% of investors are satisfied with information they receive from their funds but 29% say they have had requests for information turned down by the funds in which they invest.

* Only 14% of hedge funds indicate that investors request more information than they receive.

* Investors regularly receive the following information from funds in which they invest:

Concentration		45%
Exposures vs limit		45%
Position level detail		36%
VaR		18%
Sensitivity		10%
Stress test results		9%

* 60% of the investors who get full position level detail have their own tools to analyze; the remainder skim the information.

The survey is part of a broader review of fund of funds study, which is due out this summer.
(January 2, 2002)