Ucits Hedge Fund Risk Management

UCITS Risk Management

MARILYN RAMPLIN
CEO - RAMPLIN CAPITAL
FOUNDER - UCITS FOR HEDGE FUNDS

www.ramplincapital.com

New CESR Risk Management Proposals

•V A R
•C O M M I T M E N T A P P R O A C H
•S T R E S S T E S T I N G


New CESR Risk Management Proposals

 Old system of sophisticated vs. unsophisticated funds will be
abandoned
 The new proposals should result in improved risk management and
measurement by UCITS, which are key elements of investor
protection.
 Disclosure of risk management methodology used for calculation of
global exposure will result in greater transparency


VaR

 Both VaR & the commitment approach upheld, but
standardised to ensure harmonisation
 VaR more suitable for funds with complex
derivatives
 VaR calculation to be standardised across both
relative and absolute VaR to increase harmonisation
 VaR likely to be the preferred measure due to
proposed changes in commitment approach
 Effort to improve the use of VaR, the advisory body
also wants to enforce back-testing in all European
member states, which is not the case today.


Commitment Approach

 New limitations on the commitment approach
 Mainly used by funds with no derivatives
 Funds will have to:
 Calculate the leverage levels for each individual derivative

 Identify netting and hedging arrangements

 Calculate their ―net commitment‖ (ongoing liability to the
market).
 Market Fear - new measures to increase cost of risk
management


Stress Testing

Stress Testing for :
 Liquidity risk
 At least once a month
 Performed as part of the risk management process

―The stress-testing programme should be designed to
measure any potential major depreciation of the UCITS
value as a result of unexpected changes in the relevant
market parameters and correlation factors,‖ says CESR.‖


Core tools to measure and manage market risk

VAR
STRESS TESTING


VaR
VaR
• Potential loss from simulated historical market moves based on
worst days over the last year
• Useful for understanding the risks within a range under normal
market conditions

A UCITS may assess its exposure by the use of a VAR model.
Recommended parameters for calculating VaR:
•99% confidence interval
•holding period of one month
•'recent' volatilities, i.e. no more than one year from the calculation
date
IF YOU CANNOT MEASURE IT, YOU CANNOT MANAGE IT


Stress Testing
Stress Testing
• Useful for understanding non-linear exposures
• Large number of stresses across all asset classes
• Combine in many ways to search for vulnerabilities

For long short leveraged UCITS funds trading derivatives, example of
elements to stress:
• Financing rates – what if my financing rates change due to a
counterparty downgrade or change in market conditions
• Collateral - Change in in collateral terms
• Significant redemptions on the fund
• Significant decrease in liquidity in the market

NOW IMAGINE THEM ALL HAPPENING AT THE SAME TIME


Safety of Assets

CUSTODIANS
PRIME BROKERS
OTC DERIVATIVES COUNTERPARTY


Custodians

The Madoff affair has shown that the obligations of
the depositaries to return assets to investors are
subject to legal interpretations and domestic
discrepancies (Luxembourg vs. France); agenda now
is a move towards a better definition and a
strengthening of depositaries’ responsibilities


Prime Brokerage

Lehman has increased the awareness of restitution
risk, i.e. restoring to the rightful owner assets that
has been taken away, lost, or surrendered.

 Segregation of assets (sub-custody agreement)
 Rehypothecation of assets / collateral
 General creditor status
 Balance Sheet exposure (securities / cash)


OTC Counterparty Exposure

Max 5% or 10% counterparty exposure for OTC derivatives

Measure :
• Notional is a reference amount and not a good gauge of risk exposure
• Mark to market exposure is the current value of a derivative contract
and is a key measure
• Calculation under UCITS:
Mark to market of the derivatives
+
Independent Amount posted under your ISDA


Managing Counterparty Exposure

• Choose financially strong , quality counterparties, balance
sheet
• Manage concentration risk of counterparties through:
• Collateral
• Resetting derivatives positions on a periodic basis
• Risk is not just default of the counterparty, but change in
credit rating of the counterparty
• What is the risk of a single counterparty
• More dynamic monitoring of counterparty ratings – CDS
credit spreads
ITS A RELATIONSHIP, MANAGE IT


Collateral Management —Fact vs. Fiction

Fiction Fact

Collateral… Collateral…
• Eliminates credit risk • Mitigates credit risk and
• Reduces probability of
transforms it into:
default • Legal risk
• Operational risk
• Guarantees zero losses
• Market risk
• Doesn’t cost anything • Liquidity risk

• Always works • Is a risk diversification
strategy


Managing Counterparty Risk
Netting is allowed
Regulation allows for early termination of derivatives with
counterparties
Collateral must satisfy the following requirements :
• Subject to a daily mark to market
• Appropriate haircuts
• Government bonds or cash
• Held by a third party custodian other than the collateral
provider
• Enforceable at any time

Collateral can be posted to manage this
counterparty exposure


Ramplin Capital

Ramplin Capital can help clients implement a holistic risk
management process by managing the risks associated with
activities that affect both return ON assets and return OF assets.

Your expert partners in:
 Risk Management

 OTC derivatives

 Safety of assets

 UCITS hedge funds structuring & distribution


Ramplin Capital

Marilyn Ramplin
CEO Ramplin Capital
Founder UCITS for Hedge Funds
+44 20 7266 4423
+44 7515 692480
marilyn@ramplincapital.com
www.ucitsforhedgefunds.com


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