Financial data technology company Convergence has launched a tool that can be used by service providers to understand a client’s risk profile, and can provide investors with daily due diligence reports on their alternative asset managers.
Advisor Complexity Profile has data on about 8,300 managers in private equity, real estate, venture capital, hedge funds and structured asset funds, identifying each one as a high-, medium- or low-complexity profile.
It gathers, updates and disseminates the profiles every day, in accordance with the fact that investors such as pension funds have a fiduciary responsibility to perform manager due diligence on an ongoing basis.
“We’re not implying that the manager is not managing the risk. We’re suggesting that those who look at the manager understand the complexity matters and focus on those items to ensure that those risks are being managed,” Convergence co-president George Evans told pfm.
The tool identifies 40 conditions and has a mathematical algorithm that scores the intensity of each condition.
“Once we know the severity of the condition, we put high, medium or low profile on each condition. If over 25 percent of the 40 conditions are identified as high, we say the manager has a high complexity profile,” Convergence chairman and co-president John Phinney told pfm.
Examples of complexities include the fact that a firm does its own fund administration, or evaluating a high portion of its own products that create conflicts of interests.
“A potential red flag would be what we call business concentrations, which means, for example, as a client you represent half of an audit firm’s annual fee revenue,” Phinney said. “We’d say you have a concentration with that auditor and therefore may have a conflict you need to deal with, but you as a client don’t know that percentage because you don’t know how big the auditor’s book is.”
He said there are three different customer bases of this new product. The managers themselves look at their complexity profiles for peer and competitor comparisons. Services providers, such as fund administrators, prime brokers and accountants, would use the tool to understand a client’s complexity, risk profiles and addressing client needs, and third, investors such as pensions and endowments would use the tool as part of their due diligence process.
Convergence, founded in 2013 by Phinney and Evans, provides data, research and analytics, and surveillance and monitoring services.