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How to Learn to Love Your Risk Manager


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Risk management is a value-added function, not a compliance function. This talk describes how the risk manager and the risk taker work together to manage risk for increased value. A talk given July 19, 2013.

Published in: Economy & Finance, Business
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How to Learn to Love Your Risk Manager

  1. 1. How to Learn to Love your Risk Manager Barry Schachter Gloria-Mundi, LLC For presentation at the Drobny Macro Summer School July 18, 2013
  2. 2. Evolution of a Risk Manager 1987 1994 1997 1998 200 0 2007 ??
  3. 3. My Philosophy
  4. 4. Philosophy at Work Information Analysis Dialogue
  5. 5. The 10 Risk Management Principles  Only take risks you like  Avoid unexplainable price action  Whatever can go wrong, will go wrong  Liquidity is a fickle friend  Exiting is the best hedge  Risk regimes change  Diversification is about factors not positions  Don’t be dogmatic about your views  Risk limits are your friend  You are the (best) risk manager
  6. 6. Risk Information: If You Don’t Understand It Don’t Use It
  7. 7. VaR: what’s it good for? absolutely… Tool of convenience Highly subjective Uses Yardstick relationships forecast Data sensitive
  8. 8. VaR is Not the Most You Can Lose
  9. 9. Your Choice: Risk Mumbo-Jumbo or Risk Analysis
  10. 10. Use Marginal Risk to Build Better Portfolios
  11. 11. The insidious risk: liquidity Crowded trades Herding Contagion Trading desk can help
  12. 12. Data Dependence Impact
  13. 13. Scenario Stress Testing: Worst Cases Can’t find Black Swans this way
  14. 14. Reverse Stress Testing: How (not) to Lose $1MM (or more)
  15. 15. Hedges Neutralize unwanted risk Protect against gapping Systemic risk management
  16. 16. Dialogue: relying on trust and partnership Question assumptions Provide a sounding board, give feedback Be a coach
  17. 17. Cognitive Biases: when you are your own worst enemy Confirmation bias Availability bias Recency bias Hindsight bias Overconfidence bias
  18. 18. P&L Attribution What risk factors are driving P&L? Do the risks and P&L line up? What tendencies appear over time?
  19. 19. The Ultimate Risk Manager is You