Open Protocol

The Standards Board for Alternative Investments (SBAI) has published updates to the Insurance Open Protocol (“IOP”). The IOP forms part of the Open Protocol (“OP”) risk aggregation templates that were first launched in 2011, which standardise the collection and representation of risk information of investment funds for investors, and which is currently used by funds representing over $1.85tn in assets under management. [1] IOP provides a risk reporting template for funds that have a significant exposure to property catastrophe insurance risk. It has been developed to cater for the unique characteristics of property catastrophe exposure, including risk types, sources of leverage, stress tests results and side pocketing. Michael Hamer, Partner and Senior Investment Analyst at Albourne Partners said: “IOP’s risk reporting has been expanded to include information at the manager, fund, and share class level, and at intervals that are better aligned with the insurance cycle. The increased reporting of stress test results and the flexibility to add new stress events to the template in the future should materially improve the ability to see how funds interact from an overall Insurance Linked Securities portfolio risk perspective.”

Open Protocol data provides a window into how managers across the Hedge Fund strategies have responded to the macro-economic and geopolitical turbulence that has characterized 2022. Below, we have highlighted some key insights from the latest strategy-level data. Clients can contact their Client Account Manager or Portfolio Analyst for more information. Managers, at large, have maintained a cautious and defensive approach to positioning, as recessionary and inflationary woes continue to weigh on financial markets and volatility. Directional strategies have all turned to a net short equity exposure. CTA net exposures are shown below. Source: Albourne

Open Protocol data provides a window into how managers across the Hedge Fund strategies have responded to the macro-economic and geopolitical turbulence that has characterized 2022. Below, we have highlighted some key insights from the latest strategy-level data. If you want more information on these, or for other insights, please contact your Client Account Manager or Portfolio Analyst. Directional strategies have seen their net long exposure to equities significantly reduced. CTAs have stepped into June with a flat net exposure, while Global Asset Allocation and Global Macro, have – in aggregate – shifted to an overall net short positioning in the asset class. All three strategies have been keeping sizeable shorts in sovereign interest rates (SIR) throughout 2022. Source: Albourne Equity Long / Short strategies have also been reducing their net long exposure to equities. Overall net long exposure across strategies has moved to multi-year lows. Open Protocol data is also showing that US Long / Short managers, are building short positions in heavily impacted sectors such as Consumer Discretionary, and Real Estate. Source: Albourne

The Co-Chairs of Open Protocol, Albourne and the Standards Board for Alternative Investments (“SBAI”) are excited to announce the 2021 Open Protocol update. The update includes a module for potential ESG risk exposure and a new tab for Digital Assets reporting. Launched in August 2011, Open Protocol is a free and publicly available exposure and risk reporting framework for Alternative Investment Funds. Open Protocol is taking the lead in addressing the increase in investor demand for consistent and comparable data by expanding its risk reporting framework into ESG and Digital Assets. The new ESG module helps enable investors to better understand the potential ESG profile of their portfolio as a starting point for further discussion with investment managers. The new tab for Digital Assets allows investors to assess their exposure to different types of digital assets and changes in allocation over time. The data can be aggregated across funds, thereby providing investors with an overall understanding of exposure. “At the SBAI, our mission is to improve industry outcomes by promoting responsible practice, partnership, and knowledge. Key to this is making the industry more transparent and efficient. We are excited to expand the Open Protocol framework in the important areas of ESG and crypto risk reporting to facilitate better investment decision making by institutional investors,” says Thomas Deinet, Executive Director of the SBAI. The changes to the Open Protocol framework were developed in consultation with the Open Protocol Working Group, the SBAI Responsible Investment Working Group and other parties with interest in Open Protocol and Digital Assets. “After over a decade of providing a consistent framework to enable investors in alternatives to compare ‘apples to apples’ – we are delighted to be taking risk transparency to the next level. Both ESG and Digital Assets hold their own challenges when it comes to consistency and transparency. By incorporating them into an established framework with reporting managers representing over $2.37trn of AUM1, we are starting the journey in pushing the boundaries on ESG and Digital Asset Reporting,” says Gaurav Amin, Albourne’s Head of Fintech and Implementation. The new Open Protocol template can now be accessed in SBAI’s Toolbox, alongside the updated Open Protocol manual and a document highlighting all 2021 changes. Funds are expected to switch to the 2021 Open Protocol template after a 6-month implementation period. 1) Environment, Social & Governance ESG data at the company level lacks a globally recognized standard and as a result is often fragmented and inconsistent, with data providers often arriving at different ESG scores for the same issuers. This complicates the assessment of ESG risk for investors who are seeking to appraise and aggregate risk across portfolios of funds and strategies. The ESG module in Open Protocol helps address this challenge by drawing upon existing sector exposure data within the Open Protocol framework such as equity, credit, convertible bonds, sovereign and interest rate exposure, real assets and commodities. The data is not intended to be a definitive picture of the ESG risks in a fund, but rather aims to provide the first step in an investor’s journey to understanding the potential ESG profile of their portfolio, facilitating further analysis and discussions with asset managers. 2) Digital Assets Digital assets are becoming an increasingly larger part of the alternatives industry, but traditional risk reporting does not usually capture these exposures and related risks. The new Digital Assets tab of the Open Protocol report helps investors understand their exposure to different types of digital assets (for instance, cryptocurrencies versus stablecoins), instrument types, liquidity, etc., and changes in exposure over time. To find out more about the 2021 Open Protocol update please click here. – ends –

The Open Protocol (“OP”) template was updated once again in October 2018 when the Global Industry Classification Standard (GICS) broadened the ‘Telecommunication Services’ sector and renamed it to “Communication Services.” This change reflects that the way people communicate, share information and entertain themselves has changed– and that companies have responded to this new dynamic of the rapid convergence between technology, media and telecom.

The Insurance Open Protocol (“IOP”) template and manual were released in June 2017. The Open Protocol Template for Insurance Funds aims to facilitate better risk disclosure around insurance risk exposures. The IOP captures data on the most important areas of insurance risk and facilitates aggregation and comprehensive monitoring of these risk exposures. Due to the uncorrelated nature of most insurance risks, the IOP adds another dimension of risk information about a portfolio, rather than adding to existing risk data dimensions. Albourne has been one of the coordinators of the Insurance Open Protocol Working Party, in a project which reflects the wide range of risks and activities in the insurance space and the rapid pace of innovation in the market. At the same time, it recognizes the growing importance of the space to investors.

SBAI, the organization previously known as Hedge Fund Standards Board (HFSB), the global standard-setting body for the alternative investment industry, has become Co-Chair of the Open Protocol Working Group. The Open Protocol template standardises the collection and representation of risk information of hedge funds and other types of investment funds, and currently is used by funds with over $1 trillion in assets under management. Open Protocol, which is an open standard which all investors and managers are free to adopt, will be added to the HFSB Toolbox. The Toolbox complements the HFSB's standard-setting activities by providing additional guidance on practical issues to managers, investors and fund directors. The materials available through the Toolbox serve as a guide only and are not formally part of the Standards and the HFSB's "comply-or-explain" approach. Open Protocol will become the fourth item in the HFSB Toolbox, following the publication of the Cyber Security Memo, Administrator Transparency Reporting and the Standardised Board Agenda.

Five years after its launch the Open Protocol has gone from strength to strength becoming a well-established industry standard and Albourne has had multiple encouraging dialogues with various regional regulators about considering Open Protocol for their systemic risk reporting requirements. Marking the fifth anniversary of the initiative, the Open Protocol template was updated in August 2016 to add Real Estate as the 11th sector, spinning out of the Financials sector. This spin-out highlights the significant growth of Real Estate within the GICS framework, which started as just two sub-industries and evolved into 13 sub-industries and two industry groups. The expansion and increasing specialization of real estate firms necessitated the creation of a distinct Real Estate sector, which has unique attributes and was noted by S&P Dow Jones indices to be the least correlated among industry groups within the (GICS) financial sector.

A working group of leading hedge fund managers, investors, prime brokers and administrators have come together to launch the Open Protocol (OP) Template. This was formally launched on 9 August 2011 in London and on 11 August 2011 in New York, with the purpose of standardizing how hedge funds collect, collate and convey risk information. The main objectives are to help hedge fund investors aggregate and integrate their exposures; to help reduce the proliferation of investor-specific risk formats requested of funds over time; and to provide regulators with a detailed technical approach forged by practitioners in the hope that a systematic approach will emerge for trying to identify systemic risk. The aim is for the Open Protocol template and manual to be updated over time when significant changes occur in the financial industry to accommodate these developments.