Funds in Guernsey
Clarus Risk Max Hilton Managing Director Tel: +44 1481 231815 max.hilton@clarusrisk.com www.clarusrisk.com
Clarus Risk
Clarus Risk (Clarus) is a niche fintech firm providing independent, institutional investment risk solutions. Following the global financial crisis there was a reactionary demand for greater transparency and independent risk reporting, and initial clients were typically fiduciaries invested in alternative investment funds, requiring a risk governance solution. Over time, regulation has become an increasingly important driver for risk management solutions, in particular funds legislation such as the Alternative Investment Fund Managers Directive (AIFMD). Clarus’ core institutional offering, RiskMonitor® (RiskMonitor), addresses AIFMD regulatory risk requirements and has also attracted interest from insurance companies and FX brokerage firms with similar regulatory risk demands. According to Max Hilton, managing director, RiskMonitor serves as a glue between key counterparties within an investment structure, typically taking position-level and NAV data supplied by the fund administrator, or custodian, and providing risk data and reports to those responsible for risk oversight and governance. As such, each client is provided with a customised solution as the combination of counterparties, necessary risk calculations, and reporting requirements is unique to each client. Mr Hilton noted: “Clarus normally provides initial consulting at takeon to ensure that ongoing risk reporting is consistent with risk policy; that risk metrics are appropriate and consistent with those employed by the portfolio manager; and that the frequency of reporting is reasonable. On an ongoing basis RiskMonitor is either administered by Clarus, or deployed as an application to clients. Our fiduciary solution, TopSheets, follows a similar model and monitors investment risk over time for trust and pension company clients. Such solutions represent an effective alternative to sourcing an ‘off the shelf’ product or to developing risk systems ‘in-house’.” Mr Hilton went on to explain that Clarus’ USP is that it is an independent and specialist firm, since financial risk solutions are its sole business. Also, that the core of its business is financial technology, rather than consulting which enables the firm to customise ongoing solutions. Prior investment risk experience is also extremely important, and the founding directors of Clarus all bring complementary experience from leading investment banks and alternative investment funds. The Guernsey funds industry benefits from an excellent reputation, particularly within private equity and private equity real estate, fund of funds and alternative finance. The funds industry in Guernsey is mature and provides a range of high quality service 40
June 2016 Corporate INTL
providers including: fund administrators, custodians, lawyers and auditors. This reputation continues to make Guernsey not only a highly attractive jurisdiction for funds, but also appealing for managers. “We are currently working with managers who are new to the Island,” said Mr Hilton. Guernsey has a well-established trade association, The Guernsey Investment Fund Association (GIFA), which represents the interests of professional firms involved in the local fund management industry such as Clarus. A number of local firms also participate in national or regional professional bodies; Clarus is actively involved with the CFA UK, and provides the chair to the ‘CFA UK Performance & Risk Special Interest Group’. The interaction between regulatory and professional bodies, locally and internationally is particularly important at a time when regulatory and competitive pressures are on the rise.” During 2015, Guernsey was one of just three jurisdictions recommended as candidates for a ‘third country’ passport under the AIFMD and, as Mr Hilton notes, this has been crucial for the Island. Guernsey’s dual regime provides managers with the opportunity to opt-in to AIFMD and benefit from its enhanced reputation and marketing framework. AIFMD has placed further scrutiny on manager substance and the need for personnel and systems to be tied to the investment management or risk management functions. “In this regard, Guernsey is relatively well placed with qualified and experienced financial services personnel,” said Mr Hilton. “Guernsey’s proximity to European financial centres, in particular London, readily facilitates the required hierarchal and functional separation without compromising operational efficiency and communication.” He added: “Our business is necessarily involved more with ‘alternative’ asset
classes, typically hedge funds but also private equity and real estate. We have seen increasing interest in AIFMD. In spite of initial resistance, perception of the legislation appears to be evolving to become desirable and internationally recognised, something which UCITS has clearly achieved. AIFMD was of course intended to provide a more robust regulatory framework for alternative funds; the challenge has been to apply a consistent set of rules and requirements for such a heterogeneous industry, and risk management has been one of the areas that has posed the greatest difficulties, particularly in its application to less liquid asset classes such as private equity. “Meanwhile, we have seen a growing interest in the use of managed accounts as an alternative to investing in a hedge fund. The drivers behind this trend appear to be the growing bargaining power of hedge fund investors to be able to negotiate their own managed account rather than being an investor in the fund; and, the operational improvements on the part of alternative managers in being able to facilitate this. Our role is typically to monitor a specific account as well as to aggregate and monitor an investor’s exposure across all managed accounts. “2016 seems set to be another extremely challenging year with broad hedge fund indices such as HFR showing a loss in Q1, following a loss during 2015. Such a tough market environment is bringing even greater scrutiny to bear on managers to demonstrate that any excess returns are truly skill-based and worthy of the associated higher fee structure. Commodity markets and commodity dependent economies have also endured a torrid time recently and we see interest in new funds looking to take advantage of specific distressed market opportunities.”