Last week Woodbine Associates, an independent capital markets consulting and research firm, welcomed aboard Jerry Waldron, Ph.D. as director of risk and portfolio analytics. He will focus on “investment performance, attribution, and risk issues that impact asset managers and brokers/dealers,” according to Woodbine’s press release.
In an interview, Waldron says to date a lot of the firm’s focus has been on front office personnel. “My experience has been on staff side in risk management area. So we’re trying to develop communication between front office decision makers and risk management functions, which is often a control function than an assistant to the business.”
Some of the big challenges, depending on the organization, is that processes are siloed in terms of decision making. That tends to result in unnecessary costs and not particularly fluid communication.
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“That’s an area we can help people improve upon,” says Waldron. “I’ve worked at commercial banks, proprietary banks, and hedge funds. And while you sit there and look at risk management and regulatory requirements, you see risk management hasn’t been improved very much since 2008. That’s because it’s been pushed into a controlled siloed world that’s not part of the decision process.”
He adds that in his experience the integration of risk management has often been a question of the key decision makers; “You can have portfolio managers who do great reporting but you can get the sense risk management is detached from investment process. Other funds won’t have slick reporting but portfolio managers are committed to risk management and reserving capital, this is preferred.”
Value of the Connection
Risk functions contribute significant information to investment decision over and above capital requirements. Part of what Waldron is trying to do at Woodbine is facilitating that connection, and let organizations know that risk function and front office functions can work cooperatively together.
"When working with regulation requirements, people who evaluate risk focus on the bar, or the losses to incur with a 95% interval of the return distribution," explains Waldron. "The point is that just focusing on that return distribution is fine if you’re a regulator, but if you’re a bank or investment decision maker, you want to know what the entire distribution looks like, not just the left tail." He adds that the biggest challenge is when managers put a lot of focus on the left and don’t focus on how to generate capital internally and what a risk management department can help provide in making those decision. "If you know the whole distribution, why focus on just the 5% loss part? Take advantage of all the information available to you.”
Waldron concludes, “We’re helping people work on performance attributions and performance options construction issues. In pension funds, asset managers have multiple sub divisions, we understand the risk aggregation with that can be tricky. Choosing their performance is a dynamic process that requires some sophistication, and we can work with that.”
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