The Open Protocol template and manual help standardise reporting procedures for collection, collation and conveying hedge fund risk information.
The objective is to define Consistent Practices, not necessarily always Best Practices. Where available, the working group has adopted commonly accepted standards and protocols.
Scope
The Open Protocol Enabling Risk Aggregation covers all areas relating to performance and risk reporting for hedge funds. It defines common principles, metrics and language to facilitate better understanding and aggregation of risk information.
Why should Managers produce Open Protocol Reports?
Since 2008 managers have experienced their vulnerability to redemptions AND to investment banks changing their terms. An Antidote to this uncertainty is access to more secure long term capital. To attract secure capital even the best funds must offer transparency. However the level of transparency and format of data currently available to investors varies tremendously from fund-to-fund and from strategy-to-strategy.
The Open Protocol is a pragmatic response to this challenge. Managers could use it to streamline their reporting requirements, ensuring that all clients are treated equally and, ideally attracting more stable institutional capital.
Why should Investors ask for Open Protocol Reports?
If available, investors have to ask for transparency. If investors receive it, they have to view and monitor it. However the problem is that right now there are:
- Multiple sources of data
- Inconsistent calculation methodologies
- Different reporting formats.
Investors are entering a perilous twilight zone: more information means more responsibility, however, that information is not currently harnessed in a way that best facilitates monitoring.
Transparency is meaningful if it is:
- Based on a uniform framework
- Derived from consistent data inputs
- Calculated by following standard methodologies
- Reported in a consistent format
- Received regularly in a timely fashion.
The Open Protocol is a pragmatic response to this challenge and has the potential to be the most significant gain for investors to come out of this period. Investors can use it to aggregate and integrate their exposures across all their investments, improving their ability to make effective investment decisions.
Why Open?
- Maximises the chance of becoming an industry standard
- Leads to cost effective solutions for clients
- Avoids conflicts of interest
- Removes artificial barriers to entry, encourages competition and creates a level playing field
- Easier for regulators to support
- Completely transparent.