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Hedge Funds Optimizer >>

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Case Study: Hedge Funds Optimizer

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Client

AlternativeSoft is a Swiss company that aims to stay the leader in quantitative portfolio construction with hedge funds and to become the leader in hedge funds quantitative selection and tactical asset allocation for hedge fund indices.

Problem Background

The main goal of the system was the creation of a Hedge Fund Optimization solution and risk management system. A hedge fund is an investment fund charging a performance fee and is typically open to a limited range of investors. Investing in hedge funds requires knowledge of the extreme risks, which are always undergoing the increased scrutiny of both investors and regulators. It is a common thing that taking financial decisions supported by solid scientific models is the best way to add value to investors' portfolios in the long run and to outperform their peers. The specific complexity of the hedge fund industry requires state-of-the-art financial solutions.

Project Overview

The HFOptimizer platform includes three modules:

  • Module I: Portfolio Construction

    The HFOptimizer platform optimizes the fund of funds or the portfolios containing hedge funds. It uses the Modified VaR, the Conditional VaR, the Maximum Drawdown, the Local Correlation or the Mean-Variance optimizations. The optimizations, based on the Value-at-Risk, are in line with the market risk regulations proposed by the Bank for International Settlements (BIS, Basel II, 1996). The use of downside risk optimization techniques allows the user to construct portfolios with low probabilities of extreme negative events. The volatility, the skewness and the kurtosis are taken into account in the optimizations.

    The speed makes it one of the fastest available on the market. In addition, the user has the ability to adjust manually his current portfolio by selling / purchasing the assets with the lowest / highest contribution to portfolio volatility or beta. This module includes data reading from Excel workbooks or some market databases, portfolio simulation, shortfall risk analysis, stress testing and hedge fund equilibrium returns using the Four-Moment Capital Asset Pricing Model.

     

  • Module II: Hedge Fund Selection

    The HFOptimizer platform gives a rating to the funds by combining a quantitative and a qualitative rating. The quantitative rating incorporates several criteria, but is mainly based on a cutting edge stepwise regression with a Sharpe based style analysis. The alpha of the manager over time is computed. The qualitative criteria can be tailor-made by the user. As the rating is fully automated, selecting the best assets easily creates the portfolios. The use of this new method offers a competitive advantage for the fund of funds manager. This technique, to select the best future hedge fund performers, has been published by academics in 2004. Each rated asset is downloadable to Excel reports.

     

  • Module III: Return Forecast

    The HFOptimizer platform integrates a Tactical Asset Allocation module. Each hedge fund's indices are forecasted for the next 1 to 6 months. A stepwise regression with lags based on significant economic factors is used. This technique is used to forecast the hedge fund or hedge fund index returns.

Results have proven to beat any competitor, with Information Ratio (i.e. out-performance above benchmark divided by the tracking error) up to 3.0 and with annualized alphas often between 1% and 4%.

Benefits for the customer

  • Top of the notch investment analysis tool was elaborated using latest complex mathematical techniques

  • Despite of its complexity the system is extremely user-friendly

Used Technologies and Products

The application uses Delphi, SQL/PLSQL, XML, WebSnap, VBScript programming technologies under Windows 9x/2000/XP operation system. MS SQL 2000/2005 and Firebird 1.5/2.0 database management systems supported for store software data. Software is fully multi-user. For keeping software clients data actual the software provides online updates using AlternativeSoft web service by HTTP and SOAP protocols.

Project workload

The project team is currently composed of 10 developers and has been in progress since 2005.


About ITC Software 

ITC Software is an advanced information technology solutions provider, focused on the global commercial and scientific markets.

With over 4047 software engineers in the Americas, Europe, Russia and Asia, and a host of world-renowned scientists at, inter alia, Harvard and MIT, ITC Software’s services range from research & development in finance, bioinformatics and FEA engineering, to cutting-edge custom software development and maintenance services in most industry verticals, to the turnkey establishment of Offshore IT Centers.

ITC Software has won numerous international awards and its centers are ISO 9001:2000 certified and CMMI level 4 pre-certified. Pricing is extremely competitive for both complex scientific applications such as bioinformatics and biomechanics, and commercial software development projects.

Become a high performance enterprise with Strategic Outsourcing, visit
www.itcsoftware.com.

ITC Software disclaims the implied warranties of merchantability and fitness for a particular purpose and makes no express warranties except as may be stated in its written agreement with and for its customer. In no event is ITC Software liable to anyone for any indirect, special or consequential damages or lost profits. The information and specifications in this document are subject to change without notice. © ITC Software, 2010. All Rights Reserved. VERSION 1.10 RK20072010-2
 

 

 

A Sampling of References

«When dealing with funds and funds of hedge funds, the AlternativeSoft’s platform is a required software that can easily deal with extreme risks in portfolio construction that no other software does today.»

Greg Gregoriou, PhD
Professor of Finance, State University of New York
Editor of the book «Hedge Funds: Insights in Performance Measurement, Risk Analysis and Portfolio Allocation», 2005

 

«AlternativeSoft is the leader in providing quantitative solutions and applications to the Fund industry. We believe the great success achieved so far is partly thanks to the quality and solid scientific foundations of AlternativeSoft programs and partly due to the user friendliness of the AlternativeSoft platform.»

Dr. Marcos Mailoc López de Prado
Director, Head Quantitative Equity Research
UBS Wealth Management
Author of the book «Investir in Hedge Funds», 2004

 

«AlternativeSoft is a practical and user friendly tool used as part of our portfolio construction and risk management process. Their extensive support and responsiveness provides added value.»

Vikas Kapoor
Managing Director, Head of Risk Management and Portfolio Construction
Ramius Alternative Solutions LLC
www.ramius.com 

 

«AlternativeSoft is the only company that provides serious quantitative solutions dedicated to serious hedge fund investing.»

François-Serge Lhabitant, PhD
Head of Research, Kedge Capital
Professor of Finance, HEC Lausanne & EDHEC
 

 

«AlternativeSoft is easy to use and a valuable tool for our fund of funds investment process. Ongoing support has been efficient and prompt.»

Emily Porter
Portfolio Manager
Universities Superannuation Scheme (USS)
www.uss.co.uk

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