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Enhance Risk Reporting with the Open Protocol on 3forge

Private Equity firms and Funds of Funds benefit from improved transparency and streamlined data aggregation by implementing the Open Protocol for risk reporting. The 3forge framework helps investors deploy these workflows to improve trust and differentiation.

The Problem

Institutional Investors such as pension funds, endowments, insurance companies, and sovereign wealth funds allocate capital to hedge funds, private equity, and alternative investments. As a result, they are exposed to risks that they should document to evaluate and manage their portfolio-wide risk.

Open Protocol Diagram

Transmitting risk and exposure data regularly and reliably was often a hurdle for investors on both sides, so in 2011 the investment advisory firm Albourne Partners led a collaborative effort with industry stakeholders to enhance transparency in risk reporting for alternative investment funds.

This effort led to the launch of the Open Protocol, initially known as OPERA, as a standardized framework for investment managers to convey risk and exposure information which facilitates aggregation and analysis for investors.

Explore the Open Protocol

The protocol covers exposure data across major asset classes, including equities, rates, credit, convertibles, currencies, real estate, and commodities. It also addresses risk management techniques such as Value at Risk (VaR), sensitivity analyses, stress tests, and counterparty risk management processes. Managers can report information at varying levels of granularity, allowing flexibility while ensuring that investors can aggregate exposures effectively.

The Open Protocol has been adopted by some regulatory bodies for risk disclosures, and it is increasingly used by Risk Aggregation Platforms & Consultants to integrate risk reports from different funds, providing broader insights to investors.

Over time, the Open Protocol has evolved to address emerging areas of interest. In October 2021, it expanded to include modules for Environmental, Social, and Governance (ESG) risk exposure and digital assets reporting. These additions enable investors to assess their portfolios' ESG profiles and digital asset exposures more comprehensively.

The Open Protocol allows investors to:

  • Collect and Organize Data: Open Protocol templates help managers categorize exposures across asset classes such as equities, fixed income, credit, real estate, commodities, and digital assets.
  • Conduct Risk Analysis: The protocol includes standardized risk measures like Value at Risk (VaR), sensitivity analysis, stress testing, and liquidity profiles, ensuring a consistent approach to risk reporting.
  • Automate Reporting Processes: By following the Open Protocol framework, fund managers can streamline risk reporting, reducing manual errors and making data aggregation more efficient.
  • Align with Investor Expectations: Many institutional investors and Funds of Funds (FoFs) require Open Protocol-compliant reports, making adoption a competitive advantage.

Who uses Open Protocol:

According to Albourne Partners, the Open Protocol is used by service providers including Goldman Sachs, Morgan Stanley, CITCO and UBS, hedge fund managers like D.E. Shaw Group, Citadel, Brevan Howard, and Lansdowne Partners, as well as institutional investors.

According to IG Prime's "State of the Hedge Fund Industry" report, 24% of institutional investors are preparing to reallocate capital because of concerns over risk management practices among other drivers.

SOURCE

Why use the Open Protocol

For Private Equity firms, the Open Protocol builds trust and signals operational readiness

Investor Confidence & Transparency

PE firms that adopt Open Protocol can attract institutional investors who demand standardized risk reporting.

Competitive Differentiation

As transparency becomes a key requirement for limited partners (LPs), private equity firms with robust reporting structures have a competitive edge in fundraising.

Portfolio Risk Management

Open Protocol enables PE firms to evaluate risk exposure across sectors, geographies, and leverage levels, improving strategic decision-making.

For Funds of Funds, the Open Protocol streamlines operations and facilitates oversight

Efficient Risk Aggregation

FoFs deal with multiple underlying funds; Open Protocol enables them to consolidate risk reports efficiently.

Comparability Across Funds

Since all funds report in a standardized format, FoFs can compare risk metrics across different strategies (hedge funds, private credit, real estate, etc.).

Regulatory Compliance & Due Diligence

Many jurisdictions require robust risk disclosures, and Open Protocol provides a consistent way to meet these obligations.

Where to start

The 3forge framework can be used to produce and consume risk reporting files structured using the Open Protocol, and 3forge has an established track record and user base in production. Contact us for more information on implementing the Open Protocol.

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