COOConnect Editorial: Interview with Dr Gaurav Amin, head of risk at Albourne Partners, about Open Protocol
Nothing comes free in life, and when it does, there are usually strings attached. It is perhaps understandable that hedge fund managers initially reacted with some scepticism when Albourne announced it was launching an open standard for data reporting with no commercial agenda whatsoever. Unveiled in August 2011, Open Protocol is now gathering pace albeit rather slowly. COOConnect Editorial speaks to Dr Gaurav Amin, head of risk at Albourne Partners, about the initiative.
COO: What exactly does Open Protocol do for hedge funds and why did you develop it?
Amin: Open Protocol is a free reporting language, which helps standardise how hedge funds collect, collate and convey risk information. We live in an environment where investors and regulators are demanding more information from hedge fund managers. Regulators, particularly the UK’s Financial Services Authority (FSA), and now the US Securities and Exchange Commission (SEC)/Commodity Futures Trading Commission through Form PF, demand that hedge fund managers supply them with information in order to help determine systemic risk. Investors, meanwhile, want to see all sorts of risk information too. Hedge funds are facing different demands from all these directions, and Open Protocol standardises and consolidates all of these data points. Managers can then produce customised reports to meet the demands of regulators and investors. Regulators might demand proprietary information that managers are not comfortable sharing with the market, such as counterparty names and exposures. The manager is able to place all of this information in Open Protocol, but can cut off a slice of the pie, so to speak, and provide confidential counterparty risk data only to regulators while investors receive aggregated counterparty exposure information. This can save managers a lot of time and costs and improve accuracy. Open Protocol helps managers consolidate risk reporting instead of having to provide specific data points to different investors. Investors can get a better idea of their portfolio level exposures by aggregating Open Protocol information from all their investments. So, Open Protocol is all about improving transparency in what has historically been an opaque industry.
COO: Open Protocol was not just developed by Albourne but was an industry-led venture. Who was involved and why was this important?
Amin: We were looking to create an inclusive solution and not an exclusive one. So we developed Open Protocol in conjunction with hedge funds, investors, investment banks and fund administrators. The hedge funds included Brevan Howard, DE Shaw, Och Ziff and Lansdowne Partners while we had high quality institutional investors such as the BT Pension Scheme Weyerhaeuser, Investcorp and Utah Retirement Systems. In terms of service providers, we worked closely with Goldman Sachs, Morgan Stanley, Credit Suisse and UBS, as well as Thomson Reuters, Citco and International Fund Services (IFS). This diversity led to a well thought out and balanced solution, which satisfied a broad range of industry participants.
COO: How exactly does it work?
Amin: Open Protocol does not replace existing risk reporting but complements it. Hedge fund managers are provided with a template and manual online. The protocol covers the following areas: firm, fund and investor details; asset class exposures, which incorporates equity, sovereign and interest rates, credit, convertible bonds, currencies, real assets and commodities; risk measures include Value at Risk (VaR), sensitivity analysis, stress tests; and finally counterparty risk. Managers can choose to report information at different grades of granularity. Grades are predefined and numbered between one and three with grade three being the most transparent. Managers can get their fund administrator or risk aggregator to carry out work on Open Protocol for them for an incremental fee or build the technology in-house. A manager owns the information and can share it with investors. If it is disclosed to Albourne, we will pass it on to our clients as specified by the manager. Open Protocol is available to all managers, investors and consultants and not just our clients.
COO: Who is currently using Open Protocol?
Amin: The initiative is gathering speed and we have got few managers already generating Open Protocol reports using a variety of grades in terms of transparency. However, 33 managers at our last annual client event, representing $300 billion of total AuM, gave public support to the Open Protocol. So far, the uptake has been by the largest and the smaller hedge funds, which are hoping to gain access to investors. We also have consultants such as Towers Watson expressing an interest.
COO: What has been the biggest hurdle when trying to convince managers to use Open Protocol?
Amin: Throughout last year, we visited a lot of hedge funds to explain Open Protocol. The biggest challenge was convincing managers there were no strings attached to the product because it was free. The only way for Open Protocol to work and make the market more transparent is by making it free but a lot of managers have had trouble reconciling this. If the solution had a commercial agenda, it wouldn’t work. But, as an industry led initiative, it is good for the industry and it is a win for regulators, a win for investors and a win for managers.