Liquid: A Quantum Leap in Hedge Fund Technology

Liquid White Paper

Moving Risk to the Front Office: Better Tools for More Complex Environments


I. Risk in the New Fund Reality

Both past and current decades remain marked by consistent uncertainty, as crisis after crisis has systemically rocked the financial markets. While these events drastically affected performance, regardless of asset class, the ripple of unforeseen exposures, shaky positions, and unmitigated risks continue to impact investors. On the buy side, risk management was traditionally relegated to the middle- or back-office—analyzed between the closing and opening bell. Risk was a nighttime operation—an afterthought—post-trading, post-execution, and secondary to performance.

But emphasis on risk is changing, and growing. More and more, hedge funds are moving risk functions from a secondary process into the front office, proactively monitoring exposures in-sync with trading and portfolio management functions. Greater risk emphasis is now placing funds in a better position to adjust strategies in real-time and ultimately take advantage of trading and hedging opportunities over shorter horizons, all while simultaneously addressing transparency concerns for investors.

II. The Risk Hurdles

This shift in risk has myriad challenges:

    • Transparency with investors
    • Potentially unforeseen costs
    • System completeness and reaction times
    • Breakdowns in process

Risk management and the ability to achieve the desired levels of transparency continue to be very difficult for hedge funds of all sizes. According to an Aite study, this in part is a result of hedge fund managers placing guards around their investment strategy and approach for years to protect intellectual property, key algorithms, and other competitive components. However, as investors now require transparency, improved data mining, analysis, and ongoing communications, hedge fund managers must reassess their tactics for making investment decisions. Achieving this new level of transparency requires sophisticated risk management controls vis-à-vis pre-trade compliance and post-trade analytics.

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