Beacon’s Neil Palmer, Co-Head of Quant Engineering, recently had the opportunity to sit down with Joanna Simpson at QuantMinds International in London. In this brief interview, he discusses the impact of risk in today’s markets on both hedge funds and their investor clients, and some of the steps that hedge funds can take to build up their risk management capabilities.

Watch the video or read the transcript below

Joanna: I’m Joanna Simpson here at Quant Minds International in London. Joining me now is Neil Palmer, Co-Head of Quant Engineering at Beacon. Thank you very much for joining me. 

Neil: Hi, Joanna. A pleasure to be here today. 

Joanna: In Beacon’s hedge funds survey, you noted that 95% of the funds are having to reduce trading because of growing risks or poor understanding of the risks. What steps are your clients taking in response to this trend? 

Neil: Hedge funds are really having to raise their capabilities. This is a bit of a wake-up call, actually. One thing that we found in our survey is that 85% of institutional investors have chosen not to invest in a certain hedge fund because of concerns about that hedge fund’s risk management. So this is becoming a really serious topic. It’s always been a serious one, but the profile is greater than ever before. What hedge funds are having to do is raise their capabilities and the flexibility with which they can analyze risks, and improve their own internal understanding of risks, and how well they communicate to investors that they’ve got a good handle on their risks. 

Joanna: And your study also said that the quality and transparency of information disclosure needs to improve for both hedge funds and institutional investors. So how are Beacon’s tools enabling Quants to respond to these concerns? 

Neil: Yes, transparency is a very important aspect. One aspect is the internal employees and officials of the hedge fund having confidence that their own calculations are in good order. And part of that is around the ability to express things as a process of simple steps that everyone can understand, where the inputs and outputs of each step can be saved and examined by relevant people. Another aspect of transparency is having the ability to report risks very flexibly, to analyse all aspects that might be of concern to investors. To do that, you need an open platform, such as what Beacon provides, where you can extend it and add new kinds of risk reporting. You can create arbitrary scenarios of risk and report those in various different ways. 

Joanna: How should a good quant platform enable quants and risk managers to be more flexible in how they calculate and report risk? 

Neil: You should be able to examine the risk that’s important to you. So for example, one of our clients trades mortgage-backed securities and they care about prepayment rates. For them, that’s a risk factor. For other clients, it wouldn’t be a risk factor. But the secret to being able to serve all these needs is having an extensible platform where you can add new risk factors or redefine them if appropriate. One of the virtues of Beacon’s platform is that we designed it from the very beginning to be open and extensible. So not only can you represent new things in your portfolio, like new kinds of instruments, you can also add new kinds of risk reporting and express existing reports in different ways. 

Joanna: It sounds like running detailed position reports and multi-factor risk analyses would take a long time. In today’s highly volatile markets, what can Quants do to get this information when they need it? 

Neil: Well, performance is ultra important. The faster you can compute things, the more you can compute, the broader the coverage of your analytics and the greater the depth. So we take that very seriously at Beacon. Obviously, technology is part of the answer, but only part of it. It depends on how you configure your particular reports, how you organise data and various processes as well. 

We have many tools in the toolbox that can allow certain kinds of valuation to be efficient. So it’s really making maximal use of those, but also recognizing that for some kinds of portfolios, simple approaches can be best of all. If you have a large portfolio of cash equities, very simple instruments, these can be risked with very simple calculations. If you have much more complicated, fancy non-linear, multi-asset instruments, you need a more sophisticated approach. But it’s really about finding the right tool for the job. And a flexible platform like Beacon is well-placed to apply different techniques to different parts of the portfolio. It’s really all about performance. The key to performance is not just throwing big machines at the problem, it’s thinking how to use the technology in the smartest way. 

Joanna: Neil Palmer, thank you very much for your time. 

Neil: Thank you, Joanna. I really enjoyed the conversation.