Analyze How Private Equity And Hedge Funds Affect Portfolio Risk
Bloomberg Markets|October - November 2020
Analyze How Private Equity And Hedge Funds Affect Portfolio Risk
IN THE WAKE OF the global financial crisis, money flooded into private equity as yield-hungry investors chased returns.
Performance boomed: Historically low interest rates catalyzed economic recovery and helped portfolio companies prosper. One data point: The number of private equity-backed companies in the U.S. increased to 8,000 in 2017, from 4,000 in 2006, according to a 2019 McKinsey report. Now, in the midst of the pandemic, portfolio company exits have all but dried up, raising questions about future earnings and causing more uncertainty for investors.

Hedge funds had a rougher road in the decade before the pandemic. Rock-star fund managers closed up shop, and institutions reduced allocations as steep fees became hard to justify. The Bloomberg All Hedge Fund Index returned an average of only 2.8% a year during the 10 years through July 31, while the S&P 500 returned 11.3% annually on average. In more recent months, though, the choppiness caused by Covid-19 has pushed allocators to increase their hedge fund holdings, especially in North America, in hopes that fund managers can take advantage of the volatility and mispricings.

Asset owners have more exposure to alternative strategies than ever, yet many still analyze their portfolios in a bifurcated way. They use sophisticated models to quantify risk and hedging ratios for stock and bond holdings, yet turn to subjective analysis and whatever delayed data managers are willing to divulge when analyzing their alternatives books.

There is, however, a solution for that. Bloomberg’s Portfolio & Risk Analytics (PORT) platform enables users to quantify aggregate risk of their portfolios even if they hold illiquid and opaque assets such as private equity and hedge funds.

PORT employs more than 20 different factor models including ones that cover private equity and hedge funds. These models are incorporated into the Bloomberg Multi-Asset Class (MAC) Risk Model. So when you analyze a portfolio that includes alternative assets along with equities, fixed income, or commodities, the model will aggregate cross-asset risk, taking into account diversification. PORT’s riskfunctionality enables you to analyze future portfolio volatility and tracking error, simulate specific market scenarios, track value at risk (VaR), and optimize to reduce risk while abiding by constraints.

LET’S TAKE A LOOK at the private equity model. Data on private equity, aptly enough, tend to be private. Yet many public pensions that hold private equity funds are required to report their holdings and returns. Bloomberg’s data-sourcing engine scrapes public records for all available data. With the help of sophisticated data cleaning and machine learning, such scraped returns and analytics can be used to formulate a reliable factor model. For more information, go to {DOCS 2080741 }.

To see how the model works, let’s analyze the publicly disclosed portfolio of the California Public Employees’ Retirement System, for example. Run {PORT }, click into the portfolio drop-down, and select [More Sources...]. In the Select Portfolio window that appears, click on Limited Partners. Type “CalPERS” in the field and select the matching item from autocomplete. Hit the Select button to load the portfolio, then hit Close. For a view that includes private equity metrics, click the View button on the red toolbar, select Bloomberg Views, and then select BBG_PRV_EQTY_VIEW. To see the PE fund analytics, click on the Characteristics tab and the Main View subtab.


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October - November 2020