Optimising Leverage Calculation and Reporting for AIFs
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With the advent of the AIFMD, risk monitoring for AIFs must transition from being an area based on due diligence and manager discretion into a much more clearly defined practice. The key challenge is to find meaningful and observable metrics which can satisfy both investors and regulators. Furthermore, these metrics must also meet the objectives and constraints set out in their prospectuses. This presentation covers the areas below: - Determining key areas to monitor - Assessing the level of leverage - Disclosures in the prospectus - Annual report disclosures
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Optimising Leverage Calculation and Reporting for AIFs
- 1. OPTIMISING LEVERAGE CALCULATION AND RISK REPORTING FOR AIFS WRITTEN AND PRESENTED BY ROSS FRENCH
- 2. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 2 What is Leverage? lev·er·age Leverage is a general term for any technique to multiply gains and losses. EXAMPLE Facts ►NAV = £100m ►Notional Market Exposure = £150m Calculation ►Under AIFMD: Leverage = 150/100 = 150% ►Under UCITS: Leverage = (150-100)/100 = 50%
- 3. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 3 Hedge Funds PARAMETER GROSS METHOD COMMITMENT (AIFMD) COMMITMENT (UCITS) SUM OF NOTIONALS (UCITS) Netting/Hedging No Yes Yes No Delta Yes Yes Yes Delta = 1 Borrowings Max(Investment, Loan) Sum of absolute values NA NA Exposure (SofEXP_ND + SofEXP_D) – Cash & Equiv. (SofEXP_ND + SofEXP_D) - H - N SofEXP_D - H - N Sum of Notionals_D SofEXP_D = Sum of the absolute values of the exposure from derivatives SofEXP_ND = Sum of the absolute values of the exposure from Non-derivatives H = Exposure from derivatives used for Hedging purposes N = Exposure from derivatives that nets with either other derivatives or direct investments “Similar risk reporting techniques to UCITS. However, some traditional methods may be inadequate for certain strategies.”
- 4. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 4 Private Equity 0 10 20 30 40 50 60 70 80 90 -1,500,000 € -1,360,000 € -1,220,000 € -1,080,000 € -940,000 € -800,000 € -660,000 € -520,000 € -380,000 € -240,000 € -100,000 € 40,000 € 180,000 € 320,000 € 460,000 € 600,000 € 740,000 € 880,000 € 1,020,000 € 1,160,000 € 1,300,000 € 1,440,000 € 0 10 20 30 40 50 60 -300,000 € -230,000 € -160,000 € -90,000 € -20,000 € 50,000 € 120,000 € 190,000 € 260,000 € 330,000 € 400,000 € 470,000 € 540,000 € 610,000 € 680,000 € 750,000 € 820,000 € 890,000 € 960,000 € 1,030,000 € 1,100,000 € 1,170,000 € 1,240,000 € 1,310,000 € 1,380,000 € 1,450,000 € “Leverage taken on by target companies does not need to be reported at the fund level.” Distribution of cash flows assuming Normality Distribution of cash flows derived from analyst assumptions
- 5. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 5 Real Estate ►Mortgages must be included in the leverage calculation. ►The leverage of a bankruptcy remote SPV which is controlled by the fund, does not need to be reported.
- 6. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 6 Final Remarks ►Don’t think in terms of ‘one size fits all’ solutions. ►Risk reporting can add value and should not be looked at purely as a regulatory tick box.
- 7. Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 7 Should you have any questions…