Risk management

How Not to Nationalize the Clearinghouses

Aug 17th, 2014 | Filed under: Derivatives, Insolvency, Risk management, Today's Post

Let's not make clearinghouses too big to fail. Or if, through, Dodd-Frank, we already have, let's turn back and reconsider that decision. That's how not to end up bailing them out or nationalizing them in due course.


What is Right & What is Wrong With the Sharpe Ratio?

Jul 30th, 2014 | Filed under: CAPM / Alpha Theory, Risk management, Today's Post

Despite what the title (Deflating the Sharpe Ratio) might cause a naïve observer to suspect, de Prado's recent presentation was more pro than con the ratio in question. Mend it, don't end it.


Eurex Clearing and DB Group: New Paper on CCPs

Jul 29th, 2014 | Filed under: Derivatives, Regulatory, Risk management, Today's Post

If such institutions as the ECB keep rewarding indebtedness, then over time they get their way. They'll get a lot of deal making, even if it amounts to a frenzy. Then investors will demand funds that play to that frenzy.


Questions in Risk: The Different Faces of Private Equity Investing

Jul 2nd, 2014 | Filed under: Private Equity, Risk management, Today's Post

Guest columnist Donna Howe, CFA, looks at the different aspects of private equity and the associated risks.


The Dynamism of a Cyclist: EDHEC on LDI

May 7th, 2014 | Filed under: Institutional Investing, Liability Driven Investing, Risk management, Today's Post

Europe's pension fund managers embrace LDI quite generally, and many embrace the "dynamic" version of that strategy. But four scholars at EDHEC find it curious they don't do so for the right reason -- they don't seem to see LDI as the risk-management imperative it is.


Back and Middle Burners: Techstag Coming to an End

May 4th, 2014 | Filed under: Hedge Fund Industry Trends, Risk management, Technology, Timely Research, Today's Post

As the TABB Group and SEI remind us in a new report, "Reinventing Buy-side Infrastructure," the legacy systems widely in use on the Buy side are inadequate to post-legacy challenges, both for traditional and for alternatives managers. There's got to be a better way.


Endowments as Agile Piranhas

Apr 27th, 2014 | Filed under: Endowments & Foundations, Institutional Investing, Risk management, Today's Post

Sophisticated institutional investors contracting with outside active managers can get positive alpha out of the U.S. equities markets, despite the arithmetical and a priori reasons for skepticism.


A Finalized Basel Rule: News and Views

Apr 16th, 2014 | Filed under: Behavioral finance, Derivatives, Risk management, Today's Post

But Basel is still part of the multinational push to fit the peg of credit derivatives into the square hole of standardized contracts and central clearing. Is the peg going to fit?


IP Rights in Software: From Settlement Risk to Data Compression

Apr 7th, 2014 | Filed under: Algorithmic and high-frequency trading, Alpha Hunters, Legislation/Court rulings, Risk management, Technology, Today's Post

The patent dispute at issue before the Supreme Court March 31st involved a computerized escrow system that serves as a third party to a deal, eliminating settlement risk. A business-method patent, in short: nothing at all to do with speed of execution, or data compression, or other such trading-infrastructure-related feats.


Global Warming and Human Ingenuity

Mar 17th, 2014 | Filed under: Book review, Infrastructure, Risk management, Today's Post

Early on in this book the author mentions that Deutsche Bank has made a small play in Royal Boskalis, a Dutch dredging and infrastructure company, one which may be in a position to capitalize on rising sea levels by building the sea walls this will require.


The Cheat Sheet from Years of Wizardly Advice

Mar 11th, 2014 | Filed under: Book review, Hedge Fund Industry Trends, Risk management, Today's Post

The story told here of Bruce Kovner and a botched soybeans trade conveys a lesson about the value of persistence, and a lesson about risk management.


Stock Crashes and the Damming of Bad News

Mar 6th, 2014 | Filed under: Academic Research, Risk management, Socially responsible investing, Today's Post

Hoarding bad news bears this meaning: at some point a lot of bad news is going to break through the informational dam all at once, producing a flood, that is, a firm-specific crash.


Those Action Levers in the Back Office

Mar 2nd, 2014 | Filed under: Derivatives, Regulatory, Risk management, Today's Post

Financial firms still have people manually implementing Excel spreadsheets in connection with various mandated stress tests, a fact that suggests to a Celent research director that Fred Flintstone runs the back office.


Would-be Error Detectors: Suit Up

Feb 18th, 2014 | Filed under: Book review, CAPM / Alpha Theory, Risk management, Today's Post

That gadfly of financial modelers and quants is back. This time, Taleb writes in such a way as to establish that he isn't a mere popularize/diluter of familiar academic arguments -- which is how the critics of many of his earlier books have painted him. And them.


Who’s Allowed to Chase Alpha: Detail Work Continues

Feb 12th, 2014 | Filed under: Derivatives, Regulatory, Risk management, Today's Post

The multi-state, multi-national law firm Pillsbury Winthrop Shaw Pittman has offered its clients, especially the banking entities among them, a guide to the principal elements of the newly finalized Volcker Rule, and it touches upon several significant concerns that industry participants have expressed.


Deloitte to Hedge Funds: Emulate the Agility of a Skier

Feb 10th, 2014 | Filed under: Alpha Strategies, Alternative Mutual Funds, Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing, Performance, Analytics & Metrics, Risk management, Today's Post

Deloitte's pie graphs emphasize the degree to which both hedge funds and PE vehicles have become dependent upon institutions in general, and detached from the retail market. But Deloitte says that 2014 "will likely see additional efforts by alternative fund managers to engage the retail investor base by taking their alternative investment strategies mainstream."


Celent on a Turning Point in China: Three Trends

Jan 28th, 2014 | Filed under: Currencies, Emerging markets, Risk management, Today's Post

The need for risk management in general and, more specifically, the inability of HNW Chinese otherwise to hedge against RMB exchange risk, is driving them to invest overseas.


The Growing Problem of Technology Risk

Jan 12th, 2014 | Filed under: Infrastructure, Risk management, Technology, Today's Post

Does your risk management policies cover the "blue screen of death?" Maybe they should. Guest author Stephanie Hammer looks at the growing risk associated with technology and it's not just for high-frequency traders.


What Will SCOTUS ‘See’ and Know, in Alice?

Dec 11th, 2013 | Filed under: Algorithmic and high-frequency trading, Legislation/Court rulings, Risk management, Today's Post

The U.S. Supreme Court has now agreed to hear arguments about Alice, litigation that squarely raises a question with which lower courts have struggled ever since the Bilski decision in 2010 failed to offer them any guidance: is all software 'abstract' in the legal sense, and thus as such unpatentable? If not, then what is the legal sense of "abstract"?


Mapping Investor Behavior

Nov 21st, 2013 | Filed under: Alpha Strategies, Behavioral finance, Institutional Investing, Retail Investing, Risk management, Today's Post

Guest columnists from Tesseract Asset Management look at investor behavior and risk management.


The Market’s Celestial Navigation Sextant: Five Primary Factors Every Investor Needs To Know

Nov 7th, 2013 | Filed under: Institutional Investing, Retail Investing, Risk management, Today's Post

Guest columnist firm Tesseract on charting proper risk management in rapidly changing seas.


The Pitfalls of Mainstream Asset Allocation: Linear versus Non-Linear Risk

Oct 24th, 2013 | Filed under: Asset allocation, Performance, Analytics & Metrics, Risk management, Today's Post

Guest columnist firm Tesseract looks at mainstream asset allocation and its various risks.


Is The BIS Working to Cartelize the Banking World?

Sep 24th, 2013 | Filed under: Regulatory, Risk management, Today's Post

A newly issued report by the Bank for International Settlements speaks volumes about what is happening to the world banking system as the new millennium enters its troubled teen years. I refer to the special feature, “How have banks adjusted to higher capital requirements?” written by Benjamin Cohen and included with the BIS’ latest quarterly […]


Considering the Foundations: Risk and Risk Aversion

Sep 15th, 2013 | Filed under: Asset allocation, Risk management, Today's Post

Risk aversion is a foundational consideration in finance. Oddly, the examples usually given to explain it sound a bit like incidents from an old game show with Monty Hall.


Measurement Matters: Measuring Trading Performance

Sep 5th, 2013 | Filed under: Performance, Analytics & Metrics, Risk management, Today's Post

CAIA curriculum writers look at the most important metrics.


Rajaratnam Prosecution Sends a Signal: Traders Notice

Jun 25th, 2013 | Filed under: Hedge Fund Industry Trends, Legislation/Court rulings, Risk management, Today's Post

The arrest of Rajaratnam almost four years ago and the subsequent anti-insider enforcement activity doesn't of course come as news. But it raises fascinating questions about consequences: what have been the consequences amongst traders?


EDHEC on Time Horizons and Glide Paths

Apr 16th, 2013 | Filed under: Risk management, Timely Research, Today's Post

Generalized considerations about equity and mean reversion have been institutionalized with the creation of glide path or "life-cycle" funds. but the authors of a new EDHEC paper contend that the glide paths defined by these funds don't represent the optimal approach to portfolio allocation.


Managing Risk in Fixed Income Markets

Dec 20th, 2012 | Filed under: Risk management, Today's Post

Vikas Shah discusses fixed-income risk management with Kevin Anderson, SSgA.


A Fresh Look at Track Records and Risk

Nov 29th, 2012 | Filed under: Book review, Hedge Fund Industry Trends, Hedge Fund Operations and Risk Management, Risk management, Today's Post

In Jack Schwager's view, the hedge fund industry as a whole is not a "mirage" at all. But relying on the past track record of specific funds or strategies: that is a dangerous reliance upon a mirage. Perhaps suggest that Grandma should put her nest egg in a diversified fund of funds.


140% or More: Rehypothecation for Risk Managers

Nov 28th, 2012 | Filed under: Hedge Fund Operations and Risk Management, Risk management, Today's Post

As David Belmont reminds us in his new paper for the Commonfund Institute, in the U.S. there are limits on the practrice of rehypothecation. A broker can only reuse in this way assets of up to 140 percent of the value of the client's liability to said broker. Intriguingly, in the U.K. there are no such statutory limits.


Top 10 Operational Risks: The ninth and tenth risk areas in a 10-part series

Nov 12th, 2012 | Filed under: Performance, Analytics & Metrics, Risk management, Today's Post

SEI put together a 10-part guide as an effective risk management tool to set the foundation for operational excellence. Below are excerpts from chapters nine and ten, now available for download at www.seic.com/OpsSurvivalGuide.


Portfolio Planning on the Way to the Fiscal Cliff

Nov 1st, 2012 | Filed under: Currencies, Regulatory, Risk management, Today's Post

The notion of a flight to safety has never before sounded so paradoxical. The impending fiscal cliff illustrates the unsustainable fiscal position of the U.S. Treasury, and the uncertainties this creates may generate a flight to the presumed safety of ... U.S. Treasuries.


Top 10 Operational Risks: The seventh and eighth risk areas in a 10-part series

Oct 28th, 2012 | Filed under: Risk management, Sponsored Content, Today's Post

Operational risk within investment management firms can stem from many sources. Firms also have varying tolerance levels for accepting or handling such risk. SEI believes virtually every firm can benefit from taking a fresh look at common areas of risk and consider the variety of relatively straightforward risk management measures that can readily be deployed. […]


Top 10 Operational Risks: The fifth and sixth risk areas in a 10-part series

Oct 14th, 2012 | Filed under: Risk management, Today's Post

Operational risk within investment management firms can stem from many sources. Firms also have varying tolerance levels for accepting or handling such risk.


Risk Budgeting: Newer Approaches than the ‘New Approach’ of 2000

Oct 10th, 2012 | Filed under: Book review, Risk management, Today's Post

It is not simply that VaR as classically formulated presumes a Bell curve with the very narrow tails that implies (although that is one of Stephen Rahl's criticisms in his contribution to this book, it is by now pretty much everybody's criticism). Other problems are: that VaR treats the past as the guarantor of the future, and that it arbitrarily identifies variance with risk.


Top 10 Operational Risks: The third and fourth risk areas in a 10-part series

Oct 4th, 2012 | Filed under: Hedge Fund Operations and Risk Management, Risk management, Today's Post

Operational risk within investment management firms can stem from many sources. Firms also have varying tolerance levels for accepting or handling such risk.


Wanting to Hedge and Wondering How

Sep 30th, 2012 | Filed under: Hedge Fund Operations and Risk Management, Institutional Investing, Risk management, Timely Research, Today's Post

Institutional investors and consultants are by now very sensitive to the fact of fat tail risk, and are no longer confident that diversification among traditional asset classes is a sufficient approach to the management of this risk. Portfolio changes now underway reflect this heightened sensitivity.


Selling Options: Strategies and Results

Jun 6th, 2012 | Filed under: Alpha Strategies, Risk management, Today's Post

A dollar invested in the PutWrite Index in 1986 would have been worth $12.53 in January 2011. That represents annualized growth of 10.4 percent. ACG concluded that such option writing strategy-based indexes “could appeal to investors who are concerned about low interest rates, increased volatility, illiquid investments, or sluggish stock market returns.”


EDHEC Survey: Contracts, Not Regulation, Should Clarify Restitution

May 8th, 2012 | Filed under: Academic Research, Risk management, Today's Post

The issue of restitution for loss has been very much on the midns of the asset management industry over the last four years. As EDHEC observes in its new report on non-financial risks, “The collapse of Lehman not only [showed] the world that a systemically large institution could fail; it put … the question of international cooperation and rules harmonisation on centre stage. Restitution may be rendered impossible, at least under reasonable delays, in extreme cases such as the default of an institution – reputable as it might have been.”


Of Falling Risks and Indexes

May 1st, 2012 | Filed under: Commodities, Indexes, Risk management, Today's Post

Any quantitative strategy is susceptible to being reduced to an index, and along with this, to transparency and routine. Once this happens, that "alpha" becomes "beta," and the 2 + 20 fees are no longer available. A manager in search of alpha will have to move beyond that strategy, peeling away that layer of the onion and going to a deeper, not-yet-indexable, strategy.


Axioma: Make Only the Bets You Intend to Make

Apr 11th, 2012 | Filed under: Alpha Strategies, Risk management, Today's Post

AllAboutAlpha discusses alpha, risk and constraints with Axioma CEO Dr. Sebastián Ceria.


Endowments Should Prepare for Risks of Deflation

Apr 4th, 2012 | Filed under: Alpha Strategies, Endowments & Foundations, Institutional Investing, Risk management, Timely Research, Today's Post

Traditionally, the endowment model has involved holding illiquid assets, and benefitting from the premiums that markets pay institutions with a tolerance for illiquidity. Further, this self-image of endowments as buy-and-hold institutions leads to a de-emphasis of risk management, in the expectation that near term zigs and zags will level out nicely if given enough time. Mark Schmid and Que Nguyen, both of the University of Chicago, break with this model in a recent paper. They say, “While we continue to pursue strong returns, we must do so without taking on excessive risk to the University."


Too Many Worries or Too Few for Pension Fund Sponsors

Mar 20th, 2012 | Filed under: Institutional Investing, Risk management, Today's Post

The top four risks facing pension fund sponsors, in the order of importance assigned to them by those sponsors, are: underfunding of liabilities; asset & liability mismatch; asset allocation; meeting return goals. These are the same four goals that were top rated last year. “The year-over-year consistency in the top four risk factors … is not entirely surprising” the study authors say. The consultancy and actuarial firm Milliman lowered the average discount rate from 4.53 percent in November to 4.25 percent in December 2011.


Video: Ken Shoji, Founder & Managing Partner, Stissing Lake Advisors

Mar 11th, 2012 | Filed under: Risk management, Today's Post, Video

From Lynne Feldman, Director of Marketing at the CAIA Association: Ken Shoji, Chief Operating Officer, GSB Podium Advisors LLC, discusses risk management in hedge funds, including measurement, analysis, and reporting; liquidity management; risk budgeting and allocation; and tail risk strategies . Mr. Shoji spoke with Wendy L. Coleman, CAIA, CFA, FRM, Senior Advisor to the […]


Taking A Global Look at Risk and Correlations

Feb 21st, 2012 | Filed under: Risk management, Timely Research, Today's Post

Comparing the different editions of the Axioma Quarterly Risk Review for 4th Quarter 2011 leaves some fascinating insights. For example, it is becoming more difficult over time, in much of the world, for investors to create significant diversification within the (domestic) equity portion of their portfolio, because the correlations of stock pairs have been increasing.


When the Boss is the Rogue Trader

Feb 15th, 2012 | Filed under: Commodities, Risk management, Today's Post

The Global Association of Risk Professionals has surveyed risk managers, analysts and academics to get a sense of the implications of the demise of MF Global Holdings for the role of risk managers. Its findings add to a growing sense that the firm’s last chief executive, Jon Corzine, a former New Jersey Governor and U.S. Senator, was an edge-dwelling trader at heart, eager (as Dealbook put it in an analysis in December) to play a “hands-on role in the firm’s high-stakes risk-taking;” indeed, a man enmeshed in a “romance with risk.”


What Were They Thinking? From MF Global to Raj & Bernie to LTCM…

Feb 7th, 2012 | Filed under: Hedge Fund Operations and Risk Management, Risk management, Today's Post

The right question is not what were they thinking, but what were they feeling? Get organized about detailing what feelings are being acted out and you’ve landed on the missing link in risk prediction.