The exotic world of alternative investments has exploded in the last 10 years or so, as increasingly sophisticated trading techniques have been brought to bear on increasingly sophisticated securities. The biggest challenge for investors is trying to understand the complicated risks the funds take to get their stellar returns. Hedge funds, however, are reluctant to provide this kind of risk information. Given the herd mentality in the hedge fund world, one inadvertent slip of a particular position or strategy could erase profits immediately.

Enter Measurisk, a New York-based risk-measurement firm that has developed created a new web-based service called InterSight that tries to provides hedge fund investors with transparency while preserving manager confidentiality.

Say you're a fund-of-funds manager who has a piece of three different funds and you'd like to get a better handle on their various exposures. InterSight collects data from either the funds themselves or their custodians on a monthly or weekly basis, then cranks out various risk reports—value-at-risk calculations; stress-testing and Monte Carlo analysis; and beta, delta and other Greeks at the individual security level. By logging onto your account on the firm's web site, you can see how much risk the hedge fund in question is taking overall, which individual securities in the combined portfolio are the riskiest, and what the portfolio's geographical and asset-class risk concentrations are—all without divulging the fund's specific positions.

"Risk information isn't a custodian's core competency. Custodians tend to specialize in mark-to-market and net-asset-value information.” — Neil Paragiri, Measurisk

Measurisk's independence—its core competency is risk measurement, and it's not a broker-dealer or an investment manager—helps soothe fund managers' fears about divulging such confidential information. Most of the time, in fact, InterSight obtains data from custodians, which have already consolidated it in various ways, rather than from the funds themselves.

Why don't custodians provide this kind of information to hedge funds directly? "This isn't their core competency,” says Neil Paragiri, director of product development at Measurisk. "They tend to specialize in mark-to-market and net-asset-value information.” Paragiri says the synergies between his company and custodians are so compelling that Russell/Mellon has decided to entered into a strategic alliance with Measurisk to offer various risk measurement services to its custodial clients.

Of course, Barra and RiskMetrics have been providing similar services for years. But because they're still software-based, customers must build and maintain a clunky client-server infrastructure to use their systems. InterSight, by contrast, is an application service provider, with reports delivered via web browsers. That means InterSight can charge far less for its service—though it won't specify exactly how much, except to say it ranges from $5,000 a month to $25,000 a month or more, depending on the customersize and complexity of the hedge fund portfolio in question.