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The key roles of a risk manager are to identify risks and quantify them as reasonably and accurately as possible, said Jason Koonin, ’06, Credit Portfolio Manager for Wachovia. “There’s certainly a lot of risk in quantifying risk. Many people are perhaps too dependent on data and models. You need to have the wisdom or experience to say, ‘The data coming out of your model isn’t working. Go check it.’ That’s where there is a need for the mixing of the science and the art.”
Koonin was among speakers at the second annual Risk Management Conference October 20 at the Harold Washington Library in Chicago. The event was organized by the student-led Risk Management Group.
Simulations of bad market outcomes need to take into account how a market has changed to cause those events to become more likely, said Mike Alix, chief risk officer for Bear Stearns & Co., Inc. “One of the great challenges in risk management is to incorporate changes in market structure—in the way investors are entering the market and the impact that would have on liquidity and amplification of market moves in periods of stress,” Alix said. “We only understand that rudimentarily right now. That is where the connection between the quantitative and the qualitative has to be made.”
In concept, the revised regulations of Basel II (global risk management standards) are a positive development for risk managers because they connect regulatory capital requirements to risk, he said. “In years past there had been great divergence between views of risk and a lot of consequential inefficiencies in capital allocation and market activity,” Alix said. Although it is a “minor annoyance” to risk managers, Sarbanes-Oxley forces firms to simply state their controls of risk management are appropriate and robust, he said. “It’s actually quite easy to do,” Alix said.
However, hedge fund regulation would be far more difficult, he said. “The capability of the regulators to do appropriate, deep supervision of hedge funds is limited, both in terms of the skill set that is available to the regulatory community and because of the fact that there are so many more hedge funds than there are other major financial intermediaries,” Alix said. Insuring hedge fund compliance with U.S. securities laws is “perhaps reasonable,” he said.
Over the last five years, risk management has experienced the greatest innovation of financial markets in modern history, Alix said. The primary challenge risk managers face is understanding the enormous innovation, product development, and new investors, he said. “Notwithstanding the Amaranths, Revcos, and Enrons, the wind has been at our backs for the last several years,” Alix said. “Global policy has been very accommodating and global economic growth has been good. The question is, what happens when it turns? There’s going to be a surprise or a hiccup. The challenge for risk managers is to help our firms understand what it means to have a turning market.”
Second-year student Yongsoo Kim, co-chair of the conference, said organizers chose the panel’s speakers to expose students to risk managers who represent a variety of experience. “When they think of risk management, many people think of sales and trading,” Kim said. “We wanted to tell people that risk management is a more diverse, broader term than that. That broader sense translates into various career paths.”
—Phil Rockrohr