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Alternative Investment - September 17, 2012

The diversity in styles often makes it hard to identify the sources of risk - an interview with James Skeggs

In this month's interview, we talk to James Skeggs, Global Co-Head of the Alternative Investment Solutions Advisory Group within Newedge's Prime Clearing Services, about a new study from the Newedge research chair on advanced modelling for alternative investments, entitled “Robust Assessment of Hedge Fund Performance through Nonparametric Discounting,” the convergence between mainstream and alternative money management, and the value of academic research for the hedge fund industry.

James Skeggs

EDHEC-Risk Institute has released a new study from the Newedge research chair on advanced modelling for alternative investments, entitled “Robust Assessment of Hedge Fund Performance through Nonparametric Discounting.” What do you think are some of the key findings of this research?

James Skeggs: At Newedge we are delighted to have been able to partner with EDHEC Risk Institute to develop advanced methods for evaluating the performance of alternative investment strategies. The approaches used by hedge funds vary significantly, and this diversity in styles often makes it hard to identify the sources of risk within a portfolio.

The work done in this paper provides practitioners with a valuable extension to existing techniques for decomposing the risks in hedge fund strategies by incorporating nonlinear exposures to traditional assets. Because this new method does not involve the ex-ante defining of parameters, it provides a very robust tool for evaluating the risks in an investment strategy, and its performance.

Newedge has important relationships not only with hedge fund managers but also with institutional investors. Do you think that they will welcome the results of this new research?

James Skeggs: The feedback we have had so far from investors has been extremely positive. Allocators are always seeking to identify new ways to evaluate the performance of an asset manager, and to be able to appropriately assess the risk of a strategy. The robustness of the framework proposed in this research has a very strong appeal.

The next phase of research within the Newedge research chair will look at the convergence between mainstream and alternative money management. Have you been observing this convergence within the industry?

James Skeggs: Newedge has longstanding relationships with both traditional asset managers and hedge funds, and we have observed significant convergence in various aspects of those businesses in recent years. Offering a wide range of specialised services to both of these client types remains our key focus as this convergence continues. Reflecting this trend, Newedge combined our prime brokerage and institutional clearing businesses at the end of last year in a new business line called Prime Clearing Services

In the last few years, increased regulation and investor scrutiny have brought about the “institutionalisation” of hedge funds, and have led the transformation of formerly boutique investment houses into full-scale asset management firms. These firms are increasingly moving out of the niche, both into more traditional strategies, and by embracing regulated investment structures such as UCITS and Mutual Funds. At the same time, traditional asset managers have begun to employ some of the risk management and alpha creation techniques that are more prevalent in the HF industry, and are increasingly offering Alternative Investment products.

This is an exciting time for the asset management industry, and we will watch the continuation of this trend with interest.

Newedge is a long-standing partner of EDHEC-Risk Institute’s research. Do you think that EDHEC-Risk’s research is useful for your clients?

James Skeggs: Absolutely. At Newedge we firmly believe that academic research is of significant value to our industry, particularly with EDHEC Risk Institute’s unique approach to researching topics with practical application. The ability of EDHEC Risk Institute to look across all areas of the asset management industry and to identify relevant areas for improvement has led to our longstanding support, and we are delighted to continue our partnership on the “Advanced Modelling for Alternative Investments” research chair.

About James Skeggs

James Skeggs is the Global Co-head of the Advisory Group for Newedge Alternative Investment Solutions with responsibilities for the development of investor-focused research on a wide variety of hedge fund strategies including managed futures, global macro, commodity, currency, and volatility trading.

James has written papers on a variety of subjects including the performance characteristics of these strategies, and various portfolio construction questions. He spearheaded the launch of a number of strategy indices, and has designed customised performance and risk reporting for managed account investors.

He is a regular participant at industry conferences and events, and is frequently published or quoted in journals and media. James holds a BSc (Hons) in Chemistry from Durham University, is a CAIA designee, and worked for Ruffer LLP prior to joining Newedge.