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Asset Management

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Credit Where Credit Is Due

After years of standing in the shadow of the sell side, Wall Street's buy-side firms are reaping rewards by realizing risk.

Sell to the Buy Side

In the past, the sell side has had the advantage on this credit-risk front, with quantitative-risk applications historically targeting banks, broker-dealers and insurance companies, notes Little-Gill. As a result of catering to the sell-side, the tools failed to use relative valuation, a key component of a buy-side portfolio manager's mandate.

Deborah Williams, group vice president of capital markets and corporate banking at Financial Insights, explains, "Investment management is fundamentally different because they have to beat a benchmark. Everything is relative, and there is no absolute return. The risk management that came from the sell side didn't have the concept of relative risk in the system for the buy side."

The market for these tools for asset managers, however, is increasing, as technology costs decrease and ease-of-use increases, says TowerGroup's Little-Gill.

John Osborne, director of portfolio analysis and research at Alberta Investment Management, an Edmonton, Alberta, Canada-based asset management firm, notes that the credit-risk-management tools have only recently matured to a point where they've become attractive to the buy side. "I don't think they were as widely available a few years ago as they are now, particularly with a price point that makes sense," he says.

In addition, Alberta Investment's clients have only recently begun to question risk within their own portfolios. "Our large institutional clients have grown in sophistication. We've done some elementary risk numbers, but they're looking to challenge us to provide something more dynamic than we had in the past," he adds.

Alberta Investments recently opted to take on a risk solution from DST International, an investment-management software vendor based in Surrey, U.K. The solution, HiRisk, offers the firm an in-house historical-simulation model, using inputted time frames, or confidence intervals, to illustrate the historical performance of a particular investment. In addition, the solution covers the gamut of asset classes that Alberta Investments manages, and it provides reports of its analyses.

While Osborne concedes that there may be more sophisticated quantitative models in the marketplace, he says the mathematical analysis provided by HiRisk is more than adequate. "Some of them are very technically capable, but many are not very user friendly. We didn't want to have a risk manager dropping off reports at the end of the day saying you need to buy or sell this because you're overexposed. We wanted a portfolio manager to be able to use it during the process," he explains.

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