Managing multi-strategy portfolios in a fast-changing market environment is hugely challenging from a risk perspective. After a recommendation from a market peer, a UK-based multi-strategy hedge fund approached Landytech for a managed solution that would provide expert risk management support, as establishing and maintaining this function inhouse would come at significant cost. By taking advantage of Landytech’s Sesame solution and professional service expertise, the hedge fund has been able to achieve substantial cost savings compared to employing an equivalently qualified in-house risk resource.
Client: Multi-strategy hedge fund
Description: UK-based hedge fund launched in 2020 with a focus on credit
The Business and the Challenge
Launched in early 2020 by two senior professionals from a leading alternative asset manager, the firm runs two convertible arbitrage funds, with a focus on long convertible bonds, some single equity short positions, SPACs and low volumes of long common stock positions. From their experience working at a large alternative asset manager, the founders knew how imperative effective risk management would be to their success. To meet their needs, they needed a sophisticated, granular risk analysis solution with a credit-oriented focus and ability to cover credit arbitrage.
As a start-up manager with approximately $50m in assets under management, the firm didn’t want to be saddled with the substantial cost burden of establishing and running an in-house operations team. Instead, the founders wanted a managed solution that could provide the expert risk management support they required.
The founders wanted a managed solution that could provide the expert risk management support they required.
One of the hedge fund’s market peers recommended Landytech’s investment and risk reporting solution, Sesame, to the founders.
Sesame’s cutting-edge technology centralises investment data of any type and from any source to provide decision makers with a single source of truth. Through a strategic partnership with MSCI RiskMetrics, Sesame delivers advanced risk and performance analytics – including customisable scenario analysis, historical and (non) correlated stress testing, VAR sensitivity and performance contribution/attribution – to provide non-tier 1 asset managers with tier 1-quality risk, compliance and client reporting at a fraction of the traditional cost.
Sesame’s intelligent tools allow easy navigation into the complexities of the investment portfolios, producing sophisticated analysis, on-demand visualisations and custom reports, along with critical alerts on any internally-determined limits to help users make better and more informed investment decisions.
The Sesame risk platform combines with Landytech’s managed service offering, bringing the added value of experienced, professional risk oversight. The combination has proven a perfect fit for the multi-strategy hedge fund.
The Sesame risk platform combines with Landytech’s managed service offering, bringing the added value of experienced, professional risk oversight
Reaping the benefits
Working in partnership with the fund, Landytech began by creating a set of customised risk measures and reports to meet the client’s exact coverage needs and ensure continuous oversight of the modelling of bonds in RiskMetrics. The focus was on VaR sensitivity, CSO1, DVO1 and portfolio Greeks, along with position, exposition and sector concentrations.
Customised reports detail the different types of risk in the portfolios. The reports cover exposures by strategy and asset class, top long and top short, the VaR for each position, and various ‘on-demand’ stress test scenarios that Landytech created in RiskMetrics to meet the client’s requirements. For certain metrics, the hedge fund requires the exclusion of some assets, with the results reflected in the reports as well. The Landytech solution also checks on an ongoing basis that the data in RiskMetrics matches that from the hedge fund’s custodian.
In addition, the client and Landytech collaborated to develop and implement a robust risk governance framework covering risk limits, risk processes, weekly risk meetings, investment limits, alerts and daily risk reports.
Covid-19 hit soon after the hedge fund’s launch. The Landytech team responded quickly by creating specific analytics for a crisis environment – including dedicated Covid-19 stress tests, and V-, U- and L-shaped recovery scenarios – while ensuring business continuity and report analytics accuracy.
This rapid responsiveness remains a key element of Landytech’s ongoing service. As the client’s instrument coverage requirements continue to evolve, Landytech in turn has expanded the multi-strategy coverage for the firm to include SPACS, new issuance restructuring, debt restructuring, new equities, high delta convertible bonds, deep value credits, less liquid credit investments and credit default swaps.
Managing multi-strategy portfolios in a fast-changing market environment is hugely challenging from a risk perspective. By taking advantage of Landytech’s Sesame solution and managed service, the hedge fund has been able to achieve substantial cost savings compared to employing an equivalently qualified in-house risk resource. The sophisticated capabilities offered by the Sesame solution are also adding to the firm’s bottom line, helping it navigate the market dislocations and achieve a 10% return in its first year – impressive performance in highly unusual and difficult circumstances.
The hedge fund has been able to achieve substantial cost savings compared to employing an equivalently qualified in-house risk resource.
2 Nov 2022 | Blog