Lighthouse Partners says data integral to risk management

Lighthouse Partners managing director Ethan Baron says the lack of providers that marry balance sheet exposure with profit and loss statements (PNLs) is surprising, considering the importance of both sets of data in assessing a manager's skill.

He said Lighthouse's system allowed the team to see trades aggregated on a daily basis, and also recognised any shifts in exposure or breaches in risk management constraints.

Assessing balance sheet exposures and PNLs allowed Lighthouse to weed out the talent from the spin by confirming leverage, derivatives and liquidity levels with the data, which was more fail-safe than relying on a fund manager's word, according to Baron. 

"We find managers who tell us they're all about stock-specific risk and they go through great pains to minimise any common factor exposure that they might see in their portfolios … and quite often when we look at that portfolio that they hold, we don't see what we expect to see. We see more common factor risk and so the tools allow us to better assess their skill set and at times it comes through the PNL and at other times it comes through the exposure, so to have both is critical," he said.

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According to Baron, having that data allows the business to check how managers generate alpha and whether it is repeatable or a matter of luck.

He said Lighthouse Partners can construct more thoughtful portfolios based on trends and changes over time as the system warehouses daily data - unlike many off-the-shelf products which were load and wipe.

A flexible system allowed Lighthouse to assess a number of perspectives and try to incorporate unique risk management processes over time, Baron said.

"I think a lot of our peers are still in that spot where they don't have the data to even really begin to risk manage it," he said.