About Risk Fundamentals

In the second half of 2001, as a principal at Capital Markets Risk Advisors (CMRA), the world's preeminent risk consultancy, Richard Horwitz managed a project to select a risk management system for a major pension fund. The effort resulted in a database of 600 attributes describing 10 major risk management systems and an article in Risk Magazine discussing how to select a buy-side risk management system. The most significant conclusion of the article was the gap between the following:

• VaR based solutions, which originated on the sell side and are somewhat comprehensive in their coverage, but are focused on measuring volatility, were unable to explain the sources of risk, to support decisions (e.g., portfolio construction), and to analyze returns.


• Risk factor based solutions, which originated on the buy side and explained the sources of risk, could analyze returns and support decisions, but were equity focused and could not handle convexity.

This project gave birth to the Risk Fundamentals vision. In 2002, Mr. Horwitz joined Kenmar Global Investment Management, a fund of funds managing assets of over $3 billion, and began to develop a risk system that addressed this deficiency. Over the next several years, Mr. Horwitz created a “prototype” system, and rolled it out to both Kenmar's managed account platform and Kenmar's third-party hedge funds.

In 2005, Benjamin Weston, who had joined Merrill Lynch to build the Hedge Fund Development and Management Group (HFDMG), recruited Mr. Horwitz to bring his solution to Merrill and apply it across Merrill's platforms with the ultimate intention of commercializing it as the industry standard risk management and transparency software solution. Risk Fundamentals quickly became a key component of the HFDMG strategy.

Over the next several years, the system was completely rewritten to conform to Merrill's rigorous development standards and the analytics were redesigned. Merrill deployed a nine person development team over several years for this effort. This process resulted in a “production” version of Risk Fundamentals. During this period, the system was run on a daily basis on more than 50 funds. When Merrill reversed its decision to internally develop a center of expertise in hedge funds and disbanded HFDMG, Mr. Weston, a strong supporter of the Risk Fundamental solution, personally invested in Risk Fundamentals to keep the initiative going.

Risk Fundamentals found another believer in Walter Raquet, founder of WR Capital and, before that, founder of Knight Trading Group, the largest NASDAQ market maker. Mr. Raquet both contributed financing to Risk Fundamentals and began using the system for the accounts on his own separate account platform. To date, in excess of $8 million has been invested in Risk Fundamentals.

WR Capital has proven an ideal external installation site after the system was originally used internally at Merrill Lynch. As a leading separate account platform that processes several billion dollars in assets, corresponding to tens of thousands of positions, on a daily basis, WR Capital has allowed Risk Fundamentals to significantly enhance both its hedge fund and hedge fund investor functionalities.

In addition to teaming with WR Capital, Risk Fundamentals has partnered with Butterfield Fulcrum, a leading, independent administrator for the alternative investment industry, to offer a risk solution to their 700 funds. Butterfield Fulcrum recognized that investors were looking to administrators to expand their fiduciary role and thus wanted to enhance their capabilities to support their clients.

Finally, the system returned to the site of its intellectual genesis; in 2008, Risk Fundamentals began discussing a partnership with CMRA. Since its conception, Risk Fundamentals has been a system developed by practitioners for practitioners. With this goal in mind, CMRA's advisory expertise is the natural complement to the system's strong analytic functionality. Through this partnership, Risk Fundamentals and CMRA have created a platform for all the risk management needs of funds, funds of funds, and investors.

The Risk Fundamentals vision is one that began eight years ago and has undergone significant refinement and revision in the intervening years. In that same time, market dynamics have demonstrated the need for the holistic treatment of risk that only the Risk Fundamentals system supports. We look forward to expanding our network of clients and partners as the entire hedge fund industry works to absorb the lessons of the crash of 2008 and rebuild itself stronger than ever before.