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SBAI Newsletter - April 2021
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In this month’s newsletter:

  • New Stakeholders
  • New SBAI Toolbox Publication – Side-Pocketing within ILS Funds
  • Proposal to Expand Open Protocol Reporting to include ESG
  • Culture & Diversity – Join the Initiative
  • Event Summary: SBAI’s Annual Australian Institutional Investor Roundtable
  • Event Summary: Crypto Fund Due Diligence – What Should Investors be Asking?
  • Event Summary: Responsible Investment in APAC – The Expectations and The Challenges
  • Standards Corner: Archegos and Counterparty Disclosure
  • SBAI in the News
  • Upcoming Events 

New Stakeholders


The Standards Board is delighted to welcome new additions to the SBAI family.

Investor Chapter
  • Maryland State Retirement and Pension System (USA)

Signatories
  • One River Asset Management (USA)
 

New SBAI Toolbox Publication – Side-Pocketing within ILS Funds


The SBAI and its ILS Working Group has published a new Toolbox memo on the use of Side-Pocketing within Insurance Linked Strategy (“ILS”) Funds. The memo provides guidance to asset managers and investors relating to the mechanics of side pocketing within ILS funds, including a list of questions for investors to consider when evaluating side-pockets during their due diligence. 

In ILS, valuation uncertainty is often caused by the occurrence of large loss events where the losses have yet to be defined or realised. After such events, insurance strategies can suffer prolonged periods of valuation uncertainty because of the extended process of loss discovery and settlement. Side-pockets are widely used in such times and can play a valuable role in mitigating the consequences of valuation uncertainty. 

Specifically, the memo examines:
  • The objectives of side-pockets for ILS Funds including fair treatment between existing, new, and redeeming investors,
  • ILS specific considerations in side-pockets including a discussion of the “By Event” and the “By Contract” methods and the fair allocation of trapped collateral, and
  • What the SBAI Alternative Investment Standards say in terms of disclosure, timing, fees, and governance of side-pockets.

The Memo is part of the SBAI’s ILS Toolbox which also contains guidance on Valuation within ILS Funds.

To read the press release in full, please click here.


Proposal to Expand Open Protocol Reporting to include ESG


The SBAI will be considering a proposal to expand the Open Protocol Risk Reporting to include an ESG reporting tab. The proposal is for asset managers to provide GICs sub-industry (or equivalent) level exposure data that asset managers can then map to their own responsible investment frameworks. There will be a discussion held at 4pm UK time on 6th May if you would like further information or to participate in this discussion, please contact us at info@sbai.org.


Culture & Diversity – Join the Initiative


As part of the SBAI’s Culture and Diversity initiative we will be working towards producing some practical tools for increasing diversity in the alternative investment industry. The first two pieces will be based around Principles for Diversity and Diversity Beyond Metrics: How Small and Emerging Managers Demonstrate Diversity.

If you would like to provide input into these pieces or to find out more, please contact us at info@sbai.org


Event Summary: SBAI’s Annual Australian Institutional Investor Roundtable


Exiting the Covid crisis, rising equity prices, and the role of bonds as a diversifier were some of the topics discussed at the SBAI’s Annual Australian Institutional Investor Roundtable held last week. Key Highlights included:
  • Crowding: The importance of monitoring crowding within markets, in particular in “exciting” areas, (such as growth, technology and ESG), to manage risk and detect shorting opportunities
  • Short Selling: There are increasing opportunities in 2021 following a tough 2020 for shorts due to rising valuations. 
  • Portfolio Construction: Investors are focused on finding genuine value add and true alpha in actively managed strategies and are considering alternative diversifiers such as private assets and ILS.  
  • Picking Covid - “Winners” and “Losers”: A thorough understanding of the exit path from the Covid crisis was required to identify the right opportunities, including sectors discounted due to temporary uncertainty.  

The SBAI would like to thank Paul Bevin (Government Superannuation Fund Authority and Board of Trustees of the National Provident Fund), Tanya Branwhite (NSW T-Corp), Charles Brooks (Platinum Asset Management) and John Hempton (Bronte Capital) for their contributions to the panel and the Australian Securities and Investments Committee (ASIC) for their opening remarks.


Event Summary: Crypto Fund Due Diligence – What Should Investors be Asking?


There has been a rise in institutional level due diligence of crypto assets both on dedicated crypto hedge funds and on allocations by traditional macro hedge funds. Whilst overall risk assessment frameworks remain the same, there are risk areas that are more pronounced in this space such as counterparty risk, regulatory risk, and potential conflicts of interest. 

On 29th April the SBAI held a roundtable discussion on the topic of crypto fund due diligence with panellists from institutional allocators and crypto hedge funds. Key highlights from the discussion included:
  • Custody of Crypto Assets: This may be performed by third-party custodians who should be qualified custodians, insured (including coverage of insider theft) and have a reputable auditor perform Type II SOC Reporting. Investors also need to analyse security protocols and any conflicts of interest such as affiliated exchanges. 
  • Regulation: There is currently limited regulation for crypto assets. Investors and managers need to monitor emerging regulatory developments, including for example, questions about investment advisor requirements and anti-money laundering.
  • Conflicts of Interest: Crypto fund managers have played a role in financing and building the crypto market infrastructure such as custodians and exchanges. This has the potential to cause conflicts such as those seen, for example, with affiliated loan servicers and originators in structured credit. Allocators should not lower their standards on conflicts of interest for crypto funds and should expect the same levels of disclosure and conflict management.
  • Valuation: Valuation varies depending on the specific assets in the portfolio, liquid assets need detailed valuation policies and more hard-to-value assets may be better suited to closed ended funds or side pockets.

The SBAI would like to thank Andrew Chen (Lockheed Martin Investment Management Co), Steven D’Mello (Albourne Partners), Steve Kurz (Galaxy Digital) and Matt Perona (Polychain Capital) for their contributions to this informative discussion. If you would like to access the replay or find out more about the discussion, please contact us at info@sbai.org. 


Event Summary: Responsible Investment in APAC – The Expectations and The Challenges


Responsible Investment (“RI”) in APAC has become a key focus area with increased allocator interest and regulatory developments. 

On 28th April the SBAI held an event focusing on Responsible Investment in the APAC Region with panellists representing both allocators and asset managers in the region. The event also contained a presentation of the SBAI’s latest Responsible Investment Toolbox Memo that provides a detailed framework for asset managers to both determine their approach to RI and importantly to document it within a substantive policy. Key highlights from the panel included:
  • Expectations from Allocators: Allocators have the same expectations from APAC asset managers as they do for other regions including a detailed and transparent RI policy.
  • Greenwashing: Allocators will want to ensure any RI process is genuine and there are a variety of ways that this is assessed including assessment of track records is completed to understand whether newer dedicated RI products have genuinely performed well or have just been in the right place at the right time. Being a signatory to initiatives such as the PRI should not be seen as seal of approval – well thought out processes and controls (such as those described in the SBAI’s Toolbox memo) are required to demonstrate substance.
  • Regulation: No formal regulations have yet been announced but the Hong Kong SFC issued a consultation paper on climate related risks and the MAS issued guidelines on environmental risk management that cover the areas above and stewardship. (The SBAI’s response to the Hong Kong SFC’s Consultation Paper can be found here.
  • Data Challenges: Third party vendors lack sufficient coverage in Asia and correlations across different providers are low especially in small caps.

The SBAI would like to thank Subhashree Sutta (Fiera Capital Asia), Kenneth Kan (Dymon Asia Capital), Wai Leng Leong (CDPQ) and Joel Posters (Future Fund) for their contribution to this insightful discussion.


Standards Corner: Archegos and Counterparty Disclosure


At the end of March, Archegos, theoretically a family office, could not meet margin calls on highly leveraged swap positions, which led to a fire sale of assets by prime brokers resulting in significant losses to most of these banks. Media accounts of the events frequently inaccurately describe Archegos as a hedge fund which has led to increased calls for more prudential style regulation of hedge funds (despite hedge funds not being involved in this incident). The SBAI’s Alternative Investment Standards contain relevant standards on counterparty disclosure and counterparty risk monitoring, which the SBAI believes is a more appropriate way of preventing these same issues occurring in the hedge fund community:
  • Standard 4.1 discusses fund manager disclosures to counterparties of agreed information in a timely manner.
  • Standard 14 discusses a manager’s assessment of the creditworthiness of counterparties at the start of a relationship and on an ongoing basis.

In addition, the SBAI Administrator Transparency Report also provides a format for disclosure to investors of a fund’s counterparty exposure, to allow investors to monitor their own portfolio wide counterparty risk.

Read the full memo on the new Relevance of the Standards webpage.


SBAI in the News 

 
The SBAI’s recent Responsible Investment Toolbox Memo publication on building and documenting an approach to Responsible Investment has been covered by both CAIA’s blog and the Hedge Fund Law Report:

CAIA’s AllAboutAlpha blog coverage is available here.

The Hedge Fund Law Report’s coverage in a two-part series is available here:


Upcoming Events

  • 12 May 2021: Annual North American Stakeholders Forum 
  • 8 September 2021: Annual APAC Stakeholders Forum 
  • 15 September 2021, London, Annual General Assembly 
  • 2 December 2021, Montreal: Annual Institutional Investor Roundtable 

More events will be confirmed in due course. 
APPENDIX
Maryland State Retirement and Pension System
The Maryland State Retirement and Pension System (SRPS) administers retirement, disability and death benefits on behalf of more than 412,000 members. These include active and former State employees, teachers, State police, judges and law enforcement officers. As of March 31, 2021, the System’s diversified portfolio of assets exceeded $63 billion.
One River Asset Management
One River Asset Management is an SEC registered investment advisor and is dedicated to delivering high-conviction absolute-return strategies that help its clients build superior portfolios. The firm sees the world in a period of major economic, policy and political transition, with the investment landscape shifting in ways that will make the coming decade look profoundly different from the past decade. The firm’s strategies are built to profit from this dynamic environment while providing strong diversification benefits to traditional investment portfolios. Each is developed and managed by its diverse team of investment professionals with deep expertise in volatility, macro, inflation, digital asset and systematic trading/investing. 

One River Asset Management, headquartered in Greenwich, Connecticut, manages assets for some of the world’s leading institutions. The firm’s strategies are offered via commingled Cayman funds, and can be delivered in bespoke combinations for large investors via fund-of-one vehicles, managed accounts, swaps or UCITS compliant structures.
  
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