Q&A with Bruce Cundick, CIO of Utah Retirement Systems
This is a Q&A with Bruce Cundick, Chief Investment Officer of the Utah Retirement Systems. He is responsible for directing the overall operations of the Investment Department. He manages all aspects of investment functions for all plans. This Q&A will be focused on hedge fund transparency and Open Protocol Enabling Risk Aggregation.
To learn more about Open Protocol Enabling Risk Aggregation, please visit: www.theopenprotocol.org
1. As a public investor, what is your long-term view on the future of the hedge fund industry?
I am positive on the future of the hedge fund industry. However, if assets continue to pour into the industry at the current rate, returns will undoubtedly decrease and some investors will exit the space. If a number of institutional investors exit, especially those with large amounts to invest, there will be some managers who will suffer.
2. What is the current state of hedge fund reporting and transparency? Is it adequate enough for institutional investors?
The transparency has improved significantly; however, it can still be much better. Managers that refuse to be transparent will miss out on significant opportunities to procure capital. The public plans are the late comers to this space and they have large amounts of capital. They also demand the most transparency given that they are public institutions.
3. Bruce, can you explain Open Protocol Enabling Risk Aggregation (OPERA) standards?
OPERA standards are a way for all those in the hedge fund industry whether they be investors, managers, administrators, prime brokers, regulators, etc. to collect and disseminate information in a standardized format.
This becomes an enormous advantage to all parties to have information that can be aggregated and all metrics are calculated using the same methodology.
4. What are some of the key benefits of adopting OPERA standards for hedge fund institutional investors?
Investors can aggregate all their exposures across any manager and see the concentration levels they have by geography, sector, industry, strategy, etc. It becomes a significant risk tool. Because all the risk metrics calculated by the manager are calculated using the same methodology, the risk metrics are comparable across the same concentration levels. Also, the data are generated using the managers own positions. Thus the data are positions based data and not returns based data. Thus the data by each manager can be loaded into the investor’s own risk system. The statistics generated by position level data are more accurate than returns based data.
5. Currently, what types of hedge funds will the OPERA reports apply to?
The reports will apply to pretty much all hedge funds. However, arguably OPERA reports for stat-arb or high frequency managers will provide less utility given the number and frequency of the positions. Any private equity or real estate investments the hedge fund manager might have will get covered in more detail under later phases of OPERA.
6. How will OPERA reports work?
The investor and manager will determine the granularity of the reports. Those managers that are more transparent will be able to provide greater detail. The manager fills out a standardized template that will be given to the investor. The template allows managers to report exposures at three different levels of granularity. These levels are called grades 1, 2 and 3, where grade 3 is the most granular. The manager will have to at least comply with grade 1 detail. Further levels of detail will be negotiated between the investor and the manager. OPERA does not preclude the investor receiving their current customized risk reports if they so desire. In addition, OPERA is not a replacement of the risk reporting of the manager. The manager also benefits from only having to produce one report for each of his/her clients and/or regulators.
7. Are there plans to have OPERA extend to other asset classes such as private equity and real estate?
OPERA has released phase one which only applies to hedge funds. Although phase one would also apply to any long only managers the investor currently has as well. These managers are typically in the public equity and public fixed income space. At a later date, it is envisioned that OPERA will release other phases that will address the other alternative asset classes of private equity and real estate. Thus the investor will eventually be able to look at his/her whole portfolio, all asset classes, in an aggregated way using OPERA data.
8. Anything you would like to add?
The first letter of the acronym OPERA stands for open. It is an open protocol. This means that anyone can submit suggestions to the committee for changes in the data, additions or deletions. If the recommendations have merit, the reports will be changed to reflect the improvements.
One final note: OPERA is FREE to all participants. There is no charge to the investor, manager or anyone else connected with the reporting standards. We encourage every investor to ask their managers to produce OPERA reports for them.
About Bruce H. Cundick
Bruce H. Cundick is the Utah Retirement Systems Chief Investment Officer. He is responsible for directing the overall operations of the Investment Department. He manages all aspects of investment functions for all plans. The Utah Retirement Systems is a $20 billion state pension fund.
Mr. Cundick graduated Magna cum laude from the University of Utah with a Bachelor of Arts degree in Accounting and Master of Business Administration Degree. Bruce is a Chartered Financial Analyst (CFA) and a Certified Public Accountant (CPA).