Focus Sections » OTHER FOCUS SECTIONS » RISK MANAGEMENT

A ‘risk-free’ investment should be the starting point before a solution can be individually tailored.

— ‘Capturing all the risk embodied in a complex portfolio is impossible using only one parameter’ Ahmed Talhaoui, CSAM

In order to efficiently manage risk in a fixed income market, one must first understand how to measure it. The introduction of an expanding range of more complex fixed income instruments, each with its own individual risk characteristics, is challenging the traditional asset allocation and risk management strategies employed by fund managers. Developing successful strategies to invest in more “specialist” asset classes such as emerging markets, convertibles and high yield, as well as more traditional fixed income securities, requires both an in-depth knowledge of these new instruments, and, crucially, the expertise to understand and control the risks therein.

— ‘History has shown that one rogue fund can impair the overall performance of the hedge funds sector and generate very adverse publicity’ Thomas Richter, DWS

As they tend to use more complicated and more aggressive strategies than traditional funds, and are highly dependent on the fund manager’s judgement, hedge funds attract a higher level of volatility. For successful investment, risk limits must be carefully set and correctly monitored.
Hedge funds strategies deserve consideration as many of them offer the opportunity to generate returns independent of the movements of the broad capital markets.
Furthermore, many of these strategies have demonstrated the ability to generate attractive risk-adjusted returns over time.
However, as with any type of investment strategy, there are specific risks associated with hedge funds strategies that must be clearly understood by any potential investor.

— ‘The current situation in the FX options market has positive effects on the global FX markets. The balance between option buyers and sellers has clearly shifted to become more neutral’ Niklaus Meyer, UBS

Active investor trading has brought about changes in the foreign exchange options market, leading to the revival of older – but still useful – concepts.
Over the past couple of years, drastic changes have taken place in how private investors view and influence the foreign exchange options market. It has gradually become a far better environment in which to control risk.
Specifically in FX, the options market used to be a buyer’s market. Big market-making houses were generally short vega (at-the-money options) and short volgamma (out-of-the-money options). This has changed and there is a direct and a more indirect reason for this revision.

Positive gains build up over the long term, just like the car driver who is going that little bit faster than the others on a lengthy journey.

— ‘Investors should be more concerned with unconnected political and economic risks, such as revision of property rights after a presidential election, or a fall in oil or gas prices’ Dmitri Chibisov, GLOBEXBANK

Western European investors should look beyond the political risks of the Yukos affair, as Russia offers excellent opportunities, particularly in real estate.
Helped by both political stability and economic growth, Russia has been something of an investors’ heaven over the last year. But it remains important for investors to apply correct risk management filters.
On the political side, President Vladimir Putin introduced much-needed law and order, centralising power in the hands of federal authorities, reforming the legal system and bureaucracy.
Structural reforms are underway, with more emphasis on boosting competition and creating a better climate for foreign investors. The state is also introducing more transparent legislation and taxation systems.
Parliamentary and presidential elections in the coming winter and spring are not expected to bring many changes to Mr Putin’s vision, though foreign investors are likely to wait until a new government has been formed.