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Building a Comprehensive View of Complex Risks

Alternative investments are projected to increase significantly over the next few years, growing from $9.3 trillion AUM in 2022 to $18.3 trillion in 20271. Interest rate increases, market volatility, and unexpected geopolitical events have impacted all asset classes, causing risk professionals to redouble their focus on risk management and scenario analysis2. But alternatives often require more robust risk management and analytical tools to optimize returns and manage cash flows. How do you evaluate the risk and return differences between an airport, an apartment building, and packaged private debt? Or model liquidation or repositioning scenarios for perpetual capital vehicles? 

Yet adoption of new risk and portfolio management technologies in some areas has been slow, “evidenced by legacy systems that rely heavily on spreadsheets.”3 This environment is amplifying the need for more complex pricing and risk models, broader scenario testing, and faster responses. Or more simply put, alternative assets require alternative risk management tools.

At Beacon we believe that there are three essential components of a modern risk management system:

  • A single source of truth for data and models
  • Customizable and extensible models and instruments
  • Cloud infrastructure and scalability

Building a single source of truth for data and models

Building a single source of truth for data creates the foundation of effective risk analytics. Having the same “truth” in multiple places leads to an increasing burden of reconciliation activities and an incomplete or inconsistent picture of overall risk. Alternatives are often managed separately from other asset types; however, a comprehensive view of the portfolio is critical to getting a proper assessment of risks and performance scenarios. This does not mean that everyone can see everything. Position details may be confidential to a fund or group, but there should be a common understanding of macro data and views on risk, inflation, and rates. Good drill down options into various position attributes are also valuable. For example, if there is a hurricane forecast for an area, what is the fund’s exposure to real estate there? These analyses can be challenging when running a patchwork of spreadsheets, 3rd-party, and in-house systems. 

This concept applies equally to models and algorithms. Slightly different implementations of pricing models and lack of version control in spreadsheets exacerbate reconciliations and make it challenging to reproduce earlier results. A centralized and collaborative development environment and extensive integration capabilities make it possible for everyone to link to the same model, breaking down silos between teams and reusing insights from one area that benefit another. Add in enterprise-grade version control and software lifecycle management and you have a single source of models to match your single source of data – and a more stable foundation for analysis and decision-making.

Customizing and extending models and instruments

A transparent and extensible code base builds on the single source foundation with models and instruments that you can read, evaluate, and modify. Models that are black boxes can leave you overly dependent on the vendor to explain unexpected behavior, and waiting a long time for changes. Shifting strategies, like the move to perpetual capital, can introduce concerns about investment liquidity, varying time horizons, and valuation frequency. These and other market events make it vital to have consistent and transparent valuation and risk models that you know and understand, and that inform your entire portfolio.

The same flexibility holds true for financial instruments. You should not have to use a parallel system or book placeholder trades with proxy valuations and risk assessments for a new structured product or unique asset class. With instruments that are clearly defined and customizable, you specify the desired valuation model and link it to the relevant market data – the data foundation takes care of the rest, recalculating valuations in step with market changes. Transparent code and customizable instruments and models ensure that you can evaluate risks in whatever dimensions you choose.

Scaling with cloud infrastructure

Finally, cloud-native infrastructure and applications leverage the breadth and depth of cloud infrastructure to give portfolio and risk teams the insights they need when they need them. The best data, models, and instruments are of little value if there is insufficient processing and storage capacity to deliver analytics during periods of market stress or emerging opportunities – just when you need them most. For example, spreadsheet-based valuations that require Monte Carlo simulations can take 12 hours or more to run. But upload and convert these to cloud-powered tools and you can get results in minutes, improving the firm’s agility and responsiveness.

Getting an overall view of positions at specific points in time is one aspect of a good risk management platform. But what happens if the underlying assumptions change? Another critical aspect is the ability to   run “what if” reports, evolving instruments, positions, and cash flows through time under different sets of assumptions creates a broader and deeper sense of preparedness. As Blackstone CTO John Stecher said recently, “Today with the geopolitical events that are going on, you want to be able to actually see how certain assets perform under stress. How do they perform in upside scenarios, downside scenarios, various different inflation scenarios? That’s really what Beacon lets us do.”2

Increasing the breadth and speed of alternative risk analysis

Beacon’s unified development, trading, and risk management platform enables alternative asset managers to increase the breadth and depth of risk analysis, gain comprehensive visibility of risk across all asset classes, and move at the speed of markets. According to Blackstone Chief Data Architect Thomas Pologruto, with capabilities like these “we are able to answer a greater number of increasingly sophisticated questions and deliver value to each business more quickly.”4

  1. Global alternatives market projected to double in size by 2027 – Preqin | Pensions & Investments ↩︎
  2. Blackstone Building a Data Tool With Beacon for Bigger, Complex Deals ↩︎
  3. Global Pension Assets Study – 2022 – Thinking Ahead Institute ↩︎
  4. Blackstone Case Study: Centralizing Data and Analytics to Deliver Greater Insights, Faster – Beacon Platform Inc. ↩︎