How to Future-Proof Hedge Fund Risk Management

Hedge funds are increasingly adopting digital risk management solutions that can bolster their capabilities as they grow and expand in an ever-changing trading and investment landscape. While managers can’t predict in advance which markets they may operate in, which asset classes they may trade or which fund structures they’ll use in future, they can proactively plan and prepare for the future with scalable hedge fund risk management frameworks and tools.  

This article explores the challenges associated with managing risk and how fund investors and firms can benefit from comprehensive risk management solutions to effectively manage current and future risk, ensuring processes are as future-proofed as possible.

Why your firm needs a robust risk management framework

Poor risk management, heightened regulatory scrutiny, the growing complexities around data aggregation and interpretation, and legacy architectures all pose threats to a fund’s success.

As market areas and instruments evolve, fund investors need to rethink their risk management processes to ensure they are adequately future-proofed. More effective architecture that can address current and future concerns in terms of adopting new products, analytics and data can no longer be a secondary priority for managers. Nimble and scalable solutions are fast becoming the only way to ensure future requirements are addressed, so as to minimize any associated potential risks.   

The success of a hedge fund risk management strategy depends on proper management and risk oversight, which can only be optimally achieved with a comprehensive risk management framework, powered by scalable software solutions that provide automated processing capabilities.


Key hedge fund risk management challenges facing firms

Staying ahead of operational or compliance shortfalls means identifying and managing risks before they lead to problems. Here are some of the key challenges that come with hedge fund risk management.


Fully understanding risk in a fast-evolving landscape

Factors like the evolution of digital solutions, changing operational needs due to COVID-19 and the move to remote work, all contribute to the fast-evolving risk landscape. Things have, and will continue to change, and fund investors need to adjust their strategies and approaches accordingly. 

Strategic risk systems that optimize hedge fund risk management can do wonders for funds’ trading strategies in a changing landscape, especially when provisions are made for both the qualitative and quantitative data needed to make sound investment decisions and meet compliance requirements.

In this ever-changing landscape where technical solutions have become more necessary than optional, a big problem fund investors face is transitioning teams who have been using the same processes and systems for years to these new tools. Flexible, user-friendly solutions paired with effective change management, are the best way to ensure that replacing legacy systems and processes is as seamless as possible.


Changing regulations and ensuring processes and tools meet compliance obligations

As a result of the changing risk landscape due to the pandemic, regulators now expect more stringent risk management processes, as seen with the measures and guidance introduced by the FCA in 2020. Previous protocols are proving to be insufficient in the hedge fund risk management process, and because of the consequences of non-compliance beyond just hefty fines, proper due diligence, record keeping and reporting can’t be overlooked.

An effective risk management framework can help fund investors proactively deal with compliance curveballs. Hedge fund risk management solutions that enable intelligent auditing and documentation, as well as integrated data management, can help firms verify compliance quickly and easily.


Lack of visibility and siloed data sources

Industries the world over are experiencing a major shift in how data is computed, aggregated and visualized, and the same goes for trading and investment. Siloed data channels have become a problem to effective risk management, and the need to view and understand risk in as near to real time as possible means that disparate data sources need to be aggregated effectively, and subsequent data visualization and analysis must be optimized. 

Proper hedge fund risk management requires comprehensive datasets, as a lack of visibility of the full data picture at play means that risk factors may be overlooked. In order for fund investors to not only meet data compliance requirements, but also benefit from the full spectrum of insights comprehensive data provides, they need a risk management framework that is able to quickly and easily aggregate data from across data sources, and provide state-of-the-art analytics that put the data to best use. 


Volume of data and inefficiencies/manual processes

Traditional architectures that use batch-based data computing to reveal risk take a considerable amount of time to calculate risk. In a world where risk managers expect their systems to provide risk data in real time, the need for automated and scalable solutions with distributed computing in order to provide up-to-the-minute risk insights is only growing. 

Optimized solutions that can automatically compute, aggregate and visualize data in real time, without depending on manual intervention, are the go-to for hedge fund investors. The speed, reliability and accuracy of these systems allow managers to proactively monitor and respond to risk, especially when the data needed would have typically been extracted from vast volumes of data that usually takes risk managers a long time to work through.


Pressures to remain competitive

Responding to changing investor demands is crucial to staying relevant in a landscape that is becoming increasingly competitive. Not investing in the right risk management framework solution can hinder your efforts to remain competitive; as rigid, commercial off-the-shelf solutions that can’t be adapted to changing business requirements means that your systems will need to constantly be replaced with each new move to maintain relevance. 

In a landscape that continues to challenge firms’ competitive edge, funds need to demonstrate to investors that they’ve made the right investment into their risk management processes to effectively support all clients. As such, equipping your team with an effective risk management solution is necessary for ensuring your fund stays competitive in today’s market.     


5 ways to future-proof hedge fund risk management

Hedge fund risk management can be future-proofed with the support of the right software solution. Here are some of the benefits that come with future-proofing through a sophisticated due diligence solution. 


1. Data consolidation and normalisation

Successful investments depend on clean, well-structured data that can provide accurate and consistent holistic insights into a fund’s position. This also helps ensure funds comply with regulatory and investor mandates while also optimizing their own processes. Conversely, systems that are fed inaccurate or unreliable data can put funds in a compromised position, potentially resulting in poorly-informed decisions that expose allocators to risk unnecessarily. 

Hedge fund risk management that includes a comprehensive risk management solution that can streamline data gathering, consolidation and interpretation, can help fund investors better understand fund and portfolio performance, and anticipate how best to navigate future risk. 


2. Comprehensive screening, monitoring and analytical tools

A hedge fund that uses risk management software can protect itself against the risk of volatility by identifying and understanding behaviors that might lead to a fall in a fund’s value. This is achieved through effective screening, monitoring and analytical tools that document activities and consolidate data, helping allocators to effectively manage hedge fund risk. 

The most effective risk management solutions allow fund analysts to customize the information gathered and how this information is presented, in accordance with what specific insights they may need. The best risk management solution for your fund should offer the flexibility to empower you to gather the specific and granular information you need, without too much of a time or effort commitment from you.


3. Scalable solutions

Fund needs will change overtime, and as such, a scalable risk management solution is the most effective way to adapt to change without needing to replace entire systems again and again. The most flexible and scalable solutions allow funds to bring vertical systems together into a comprehensive ecosystem, and then scale in accordance with business needs. Implementing systems and processes that automatically scale when encountering rising volumes of data and information activity, allowing for accurate and timely insights, is more effective for hedge fund risk management than increasing resources only as and when the need arises. 

Firms that rely on manual processes can’t benefit from the economies of scale to expand, as they’ll need to increase staff bases (and therefore costs) to manage this growth without putting strain on existing resources. This model leaves much room for error where allocators are already focused on existing external risks that can influence fund performance, without the added pressure of onboarding additional staff to meet growth demands.


4. Auditabilty

Complete compliance is not possible without sound record keeping and paper trails that enable efficient fund auditing. Hedge funds that depend on legacy systems, processes with limited functionality, or spreadsheets will struggle to ensure auditability of their data, ultimately impacting the fund’s entire risk management process. 

A lack of auditability can make expansion difficult as funds will be limited in their capabilities to recreate necessary accounting calculations, generate reports or maintain audit trails which may be needed for introducing new products or trading different instruments. Effective hedge fund risk management requires optimal auditability to ensure compliance and efficient growth processes, and the elements needed to achieve this auditability can be provided by suitable risk management frameworks and software.


5. Portfolio construction and stress-testing

Effective risk management solutions enable more precise investment decisions as these tools are designed to help identify and mitigate risks before they become detrimental to a fund or portfolio. This is achieved through effective stress testing where firms can develop what-if scenarios that link to key risks and test these scenarios to get an indication of their risk exposure. 

Effective stress testing also lends itself to more effective portfolio construction, as fund investors can minimize the probability of negative returns through these risk measures and compare how different portfolios perform in certain market conditions. These capabilities can contribute to effective hedge fund risk management, as allocators can anticipate risks and test the impact of these risks in the event that they come to fruition.


How AlternativeSoft’s scalable hedge fund risk management solutions help your firm


AlternativeSoft simplifies fund investing for fund and investment managers, allocators, and consultants through our award-winning risk management solutions. Our solutions enable effective hedge fund risk management by empowering investors to collect all data relating to funds, construct portfolios, manage subscriptions and redemptions, and connect funds through audited digital due diligence - all at scale.  

Leveraging our comprehensive and consistently updated hedge fund database, fund investors can compare and analyze a number of hedge funds covering all used strategies, simultaneously. We also provide extensive hedge fund reporting which details hedge fund performance attribution and the risk information needed for prudent asset allocation, helping allocators prioritize risk effectively. 


Key benefits of our hedge fund risk management solutions:

  • Aggregate data from multiple sources, including Excel
  • Integrate with third party data feeds like Bloomberg, Preqin, Morningstar, and HFR, with returns updated automatically
  • Optimize portfolio management by tracking and analyzing portfolio liquidity, return attribution and P&L across an entire portfolio
  • Schedule and automate up to 100 customisable reports
  • Effectively analyze funds through statistical, peer and competitor analysis
  • Seamlessly conduct Operational Due Diligence with our cloud-based, fully auditable platform



Effectively managing your hedge fund’s risk despite changes at a market and firm level requires comprehensive hedge fund risk management solutions. From quickly collecting disparate data to recording due diligence documentation, allocators can benefit from future-proofing their risk management processes with sought after solutions that can ensure not only compliance, but sustainable and scalable growth.

Opting for a powerful risk management software solution, like AlternativeSoft’s Hedge Fund Risk Management services, means fund investors can understand their portfolios’ risk return profiles and how to best manage risk in relation to future growth. If you’re looking for a portfolio risk management tool, our helpful guide outlines what to consider when choosing your solution, ensuring it’s the best fit for your needs.

Manage risk effectively with AlternativeSoft