OPTIMISING LEVERAGE CALCULATION AND RISK REPORTING FOR AIFS

WRITTEN AND PRESENTED BY ROSS FRENCH

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What is Leverage?

lev·er·age

Leverage is a general term for any technique to multiply gains and losses.

EXAMPLE

Facts

► NAV = £100m

► Notional Market Exposure = £150m

Calculation

► Under AIFMD: Leverage = 150/100 = 150%

► Under UCITS: Leverage = (150-100)/100 = 50%

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Hedge Funds

PARAMETER GROSS METHOD COMMITMENT

(AIFMD)

COMMITMENT

(UCITS)

SUM OF NOTIONALS

(UCITS)

Netting/Hedging No Yes Yes No

Delta Yes Yes Yes Delta = 1

Borrowings Max(Investment, Loan) Sum of absolute values NA NA

Exposure (SofEXP_ND + SofEXP_D) –

Cash & Equiv.

(SofEXP_ND + SofEXP_D) - H -

N SofEXP_D - H - N Sum of Notionals_D

SofEXP_D = Sum of the absolute values of the exposure from derivatives

SofEXP_ND = Sum of the absolute values of the exposure from Non-derivatives

H = Exposure from derivatives used for Hedging purposes

N = Exposure from derivatives that nets with either other derivatives or direct investments

“Similar risk reporting techniques to UCITS. However, some traditional methods may be inadequate for certain strategies.”

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Private Equity

0

10

20

30

40

50

60

70

80

90

-1,5

00,0

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-1,3

60,0

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-1,2

20,0

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-1,0

80,0

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-940

,000

€

-800

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€

-660

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€

-520

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€

-380

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€

-240

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€

-100

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€

40,

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€

180

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€

320

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€

460

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€

600

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€

740

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€

880

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1,1

60,0

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1,3

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1,4

40,0

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0

10

20

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-160

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€

120

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€

190

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€

260

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€

330

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€

400

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€

470

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€

540

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€

610

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€

680

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€

750

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820

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890

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960

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“Leverage taken on by target companies does not need to be reported at the fund level.”

Distribution of cash flows assuming Normality Distribution of cash flows derived from analyst assumptions

Copyright © Arkus Financial Services - 2014 Optimising leverage calculation and risk reporting for AIFs Page 5

Real Estate

► Mortgages must be included in the leverage calculation.

► The leverage of a bankruptcy remote SPV which is controlled by the fund, does not need to be reported.

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Final Remarks

► Don’t think in terms of ‘one size fits all’ solutions.

► Risk reporting can add value and should not be looked at purely as a regulatory tick box.

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Should you have any questions…