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Understanding and Mitigating Unintended Risks

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Stockholm (HedgeNordic) – Many hedge funds, particularly in the Nordics, operate as small boutique firms with relatively limited staffing. Despite their size, these hedge funds often employ complex investment strategies that may require some of the most advanced risk management systems. Axioma, a leading provider of factor risk models, portfolio construction tools, and multi-asset class enterprise risk solutions, currently merging with Danish investment management software provider SimCorp, aims to meet this need, supporting fund managers and investors to grasp the nuanced risks embedded in their portfolios.

“Hedge Funds are today facing a plethora of systematic risk to navigate, from heightened geopolitical risk to higher-for-longer interest rates and inflation,” says Fredrik Gärdsfors, Client Executive for the EMEA region at Axioma. “In navigating this evolving investment landscape, a flexible and holistic approach to portfolio construction and risk management becomes imperative.” Axioma seeks to address these needs with an analytics suite guiding managers throughout the entire investment process, covering strategy building and optimization, risk model customization, pre-trade compliance, arbitrage opportunities and regulatory reporting solutions.

Axioma Portfolio Optimizer

Axioma’s Portfolio Optimizer is a purpose-built financial decision-making tool that can handle the most complex problems efficiently. This advanced portfolio construction tool is designed to work with a manager’s given investment process (and not the other way around), supporting a wide range of investment management approaches, from quantitative to fundamental. “With virtually limitless objectives and an equally unlimited range of constraints, Axioma Portfolio Optimizer delivers maximum flexibility for more informed decision making,” explains Gärdsfors. “Testing scenarios is quick and efficient at helping a user explore different trade-offs and frontiers, which can ultimately lead to the identification of alpha signals in the final portfolio.”

“With virtually limitless objectives and an equally unlimited range of constraints, Axioma Portfolio Optimizer delivers maximum flexibility for more informed decision making.”

Importantly, the optimizer accommodates long/short portfolios for short selling and efficient trade execution. By handling multiple constraints and inputs, the optimizer, in conjunction with analytics data, exemplifies how hedge funds can mitigate unintended risk. This enables hedge fund managers to take decisive action on how best to hedge the portfolio and generate alpha. “Performance, in this context, is also dependent on the overall cost structure, so it’s important to consider market impact and total transaction costs within this process, to reach the right decision and optimize the trading strategy,” emphasizes Mourad Essofi, Managing Director for the EMEA region at Axioma. “At the end of the day, Axioma’s objective with Axioma Portfolio Optimizer is to enable hedge funds to make quicker and more informed decisions, as well as help mitigate risk.”

Axioma Risk

Moving further along the investment process and leveraging the scale and cost efficiency of cloud technology, Axioma Risk steps in to offer managers greater visibility of risk. “At its core, Axioma Risk calculates and aggregates core risk measures to understand the risk profile of a given portfolio, with a broad range of configurable analytics, including exposure and sensitivity analysis, scenario analysis, and risk analysis,” explains Gärdsfors. Each delivers a different insight. Each analytical aspect provides unique insights. For instance, one could use effective exposure and sensitivity analysis for profiling directional risk of the portfolio, while risk analysis (through VaR or volatility analysis) helps quantify variability, or losses in the profit-and-loss. 

“At its core, Axioma Risk calculates and aggregates core risk measures to understand the risk profile of a given portfolio, with a broad range of configurable analytics, including exposure and sensitivity analysis, scenario analysis, and risk analysis.”

“Finally, scenario analysis allows risk managers to replay past events and model potential future events,” says Gärdsfors. “All such analytics use true full revaluation. This allows risk managers to capture the true asymmetry that may arise with non-linear instruments, while our hedge fund-specific dashboards provide what-if analysis, so that managers can test hypothetical changes in the portfolios,” he elaborates.

While Axioma Risk has a long history of tracking equity-related risk, natively integrated into the platform, it hasalso evolved to include fixed-income and multi-asset class investing. “From this foundation, we’ve built fixed income risk models using issuer spread curve modeling, followed by a credit spread factor model,” notes Gärdsfors. “Naturally, these models combine with FX, volatility, and commodity models, to offer true multi-asset coverage.”

Two Key Challenges to Solve

Axioma Risk addresses a number of challenges faced by hedge fund managers, including risk budgeting and effective scenario analysis. Risk budgeting allows risk managers to assess both fund-level risks but also wider strategy and trade-level risks. “Using Axioma Risk, risk managers can assess whether the levels are within their risk policies,” explains Mourad Essofi. “When the risk levels fall out of line, they can understand the decomposition by trades and strategies, for faster resolution,” he elaborates. “Finally, using the what-if analysis functionality through the user interface or API, managers can test adjustments to various allocations to see how such changes may impact the risk level of the total portfolio.”

“Using Axioma Risk, risk managers can assess whether the levels are within their risk policies.”

In today’s evolving market environment, the use of risk models needs to be augmented with effective scenario analysis, argues Essofi. “Scenario analysis is a way for risk managers to impose their own views of the future and assess gains or potential losses in the portfolio,” he explains. “Risk managers use Axioma Risk to build customized scenarios through the lens of predictive scenarios.” The result is a more informed understanding of how portfolios might perform, following a change in factors, like equity indices, FX rates, interest rates, and commodity levels, among others. “This allows risk managers to truly stay uncorrelated to the market,” says Essofi.

Integration

Recognizing the diverse applications used by hedge fund managers such as OEMS, Position and Risk, Market Data Terminals, Analytics, Chat, Excel, BI Tools, and more, Axioma emphasizes seamless integration. “We believe embedding our portfolio construction and risk analytics tools should not be onerous for hedge funds, which is why our solutions are built with end-to-end workflow consideration, painless integration, and automation capabilities,” says Fredrik Gärdsfors. “Our technology is designed to empower clients to work with their chosen execution and order management system, enabled by our API and open architecture approach.” This means that Axioma solutions can be easily integrated into existing hedge fund systems, like OMS and EMSs. 

“We believe embedding our portfolio construction and risk analytics tools should not be onerous for hedge funds…”

“Axioma leverages a native Rest API that has been adopted by hedge funds globally, to seamlessly integrate their position feeds and extract data from internal systems,” further elaborates Gärdsfors. “The API lowers the cost of ownership of our solutions, while simplifying the upload of portfolios, terms for derivatives, the running of risk reports and exporting trade lists.”

Axioma in the Nordics

In September 2023, Axioma’s parent company Deutsche Börse Group, an international exchange organization and market infrastructure provider, acquired SimCorp. Before the merger intended to combine Axioma’s risk analytics and portfolio construction with SimCorp’s investment management platform, Axioma had already established a presence in the Nordic region. Post-merger, Axioma is poised to gain an even stronger foothold in the Nordics.

“Axioma has already been adopted by a significant number of Nordic clients, across the financial industry, from asset owners to asset managers,” according to Mourad Essofi. “All of whom leverage our solutions across a wide range of investments, from long only to hedge fund strategies, inclusive of CTA strategies and more,” he elaborates. 

Noteworthy regional use cases include Axioma Risk as a pre-trade compliance tool. “Using APIs, our solution provides the front office with a decision on whether a trade is within the risk budget and risk limits, in a matter of seconds, and directly to the OMS/EMS,” says Essofi. Tailoring to bespoke strategies and in order to integrate a client’s own IP in the process, Axioma offers risk model customization, a feature well-received by Nordic clients. In addition to supporting third-party data through its Portfolio Optimizer, Axioma has curated leading ESG and private markets data providers for clients to leverage. “This has resonated well in the Nordic region, with the more sophisticated clients looking to incorporate ESG and SDG data,” concludes Essofi.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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