Unigestion, the fund of funds and investment manager, has developed a risk reduction tool for portfolios that uses fund cash flow data rather than approximate valuations.
Christophe de Dardel, executive director, head of investment mandates for Unigestion, said the theorem dealt with the risk to investors concerning investment returns, and that while the tool was best used in future portfolio construction, it could also be used on current portfolios.
It may have an impact on the secondaries market, too, he said, as “investors can look at their portfolio with this tool and use ECDAD as an alternative measure of risk to decide, if they wish, how to re-balance their portfolio.”
The theorem, the Expected Cumulative Downside Absolute Deviation (ECDAD), quantifies the risk that a private equity fund will distribute less or later than expected to investors.
Unigestion said in a statement ECDAD uses fund cash flows as an input and measures the difference between the actual cash flow curve and the expected cash flow curve. The risk is then the amount where actual cash flows are lower than expected cash flows.
The method is more accurate than self-reported interim valuations or final multiple valuations as it results in a single number, Ungiestion said, allowing an easy comparison between funds.