Asset Managers
CMRA has consulted to many mutual fund complexes and traditional asset managers on issues ranging from best practice to risk branding to VAR to valuation.
Mrs. Rahl is the author of Hedge Fund Transparency: Unraveling the Complex and Controversial Debate published in March 2003 by Risk Books and the editor of Risk Budgeting a New Approach to Investing published in November 2000 by Risk Books. Her articles have appeared in a wide range of publications.
Selected Assignments - Asset Managers
- Advised the Buy-Side Risk Managers in the creation of "Risk Practices for Asset Managers", published February 2008
- Drafted and reviewed risk management policies and practices for numerous asset managers
- Conducted a training session for the Board of Directors of a large mutual fund complex on risk governance
- Advised several clients on Chief Risk Officer (CRO) roles, responsibilities and selection
- Vetted many complex pricing models
- Reviewed CDO valuation practices for several institutional clients
- Conducted an independent risk assessment for several large mutual fund groups complexes
- Performed a comprehensive risk assessment for many investment managers
- Updated/created risk management policy manuals for numerous investment managers
- Performed due diligence on numerous investment mangers on behalf of institutional investing
- Analyzed CDO's of a large investment manager and recommended structuring and risk management enhancements
- Reviewed and benchmarked the risk management practices of mutual funds, investment managers, and hedge funds
- Performed a review of risk management requirements for a major $100 billion+ money management complex
- Developed derivative guidelines for numerous investment managers
- Advised numerous investment managers on both OTC and exchange traded derivatives (swaps, options and hybrids)
- Conducted a multi-client study on buy-side risk management
- Advised a major asset manager in the selection of MBS/CMO pricing and risk management systems
- Co-chaired the IAFE's Investor Risk Committees Best Practices group
- Analyzed the style consistency of a value manager
- Reviewed the instruments permissible under 2A-7 and educated the largest insurer of mutual funds on the assessment of risk in more complex instruments
- Provided expert consulting in a merger regarding the valuation of complex assets
- Advised money market fund concerning "breaking the buck" " as a result of investments in mortgage backed "kitchen sinks" in 1994
- Analyzed the circumstances surrounding Orange County's unexpected collateral calls for an assessment of the impact on the overall portfolio and investment strategy
- Assisted large money manager in selecting a risk system
Services for Asset Managers
Services for the asset management community include:
- Corporate Strategy
- Evaluation of Organizational Structure
- Planning for Asset Class Expansion
- New Product Risk Assessment
- Merger and Acquisition Support
- Risk Management
- Risk Governance
- Risk Advisory
- Risk Measurement Systems
- Risk Due Diligence
- Investment Operations
- Investment Policy Setting Process for Clients
- Integrated Performance/Risk Measurement and Attribution
- Investment Management Structure Review
- Asset Management Process Review for Fixed Income, Equity, and Alternative Investment Asset Classes
- Derivative Program Review
- Alternative Investment Strategy Review
- Board Oversight
- Risk Governance Advisory
- Education for Trustees
- Internal and Regulatory Investigations
- Crisis Management (Derivatives and Structured Finance 911)
- Pre-litigation Support Analysis and Advisory Services
- Litigation Support/ Expert Witness Learn more...
- "Establishment of organizational checks and balances, including an appropriate segregation of front/back and/or middle office functions;
- Creation of a culture in which understanding and managing risk is everyone's responsibility;
- Independent control groups, including, where possible a risk manager reporting and/or having access to the [chief administrative officer], [chief executive officer], Board, Executive Committee or the like;
- Senior management and board level understanding of risks, definition of risk tolerances, and setting of risk management and ethical tone;
- An organizational structure in which risk management roles and responsibilities are clearly defined, including written policies and other procedures identifying the specific people within the organization who are authorized to approve various actions, make exceptions to various policies, etc."
Recent and Upcoming Speeches for Asset Managers
June 2008
Future of Fixed Income- Lessons Learned About How to Think About and Model Fixed Income Credit Derivatives
Gaim International - Monaco
June 18th
Valuing Assets When Liquidity Drives Up: Common Sense vs. Risk Analytics
Gaim International - Monaco
June 17th
April 2008
Emerging Issues In Credit Default Swaps (CDS)
Mealeys' Webinar
April 23rd
March 2008
Best Practices For Asset Managers
Buy Side Risk Manager's Forum
March 25th
August 2007
Is Subprime the "Canary in the Mine?"
Merrill Lynch
CMRA in the Press re: Asset Managers
VaR Enough?
Market turbulence tests the limits of Value at Risk
By Irwin Speizer
When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things."
A veteran of 35 years in the financial industry and a financial engineering pioneer, Rahl ran the derivatives business at Citibank in the 1980s before establishing her consulting firm in 1991. She preaches the importance of rigorous risk analysis and testing to cope with the impact of the types of investments she peddled in her earlier role.
Rahl recommends applying stress tests to see how a portfolio would react to sharp drops, market shifts, unusual situations or changes in underlying assumptions. Stress-testing models, which are included in risk systems, can reveal weaknesses that a simple VaR test misses. But Rahl says too many financial firms continue to rely mostly on VaR. Back in April 2000, Rahl's firm conducted a survey of risk practices and found that 45 percent of financial firms, including hedge funds, were not using stress tests at all. Although she hasn't updated the survey, she says she has noticed only a slight improvement since then.
"In risk management only about a third is quantitative," Rahl says. "A third is still a big part of the puzzle, so it is quite valuable." The remaining two thirds of the puzzle is where good risk managers earn their money. Ultimately, an accurate forecast depends on knowledge, experience and chutzpah.
"It has nothing to do with the computer," Rahl says. "It has to do with wisdom and experience."
And perhaps a bit of luck.
(June 2008)
Risk Management Gains Higher Profile
By Beagan Wilcox
As losses stemming from defaults on subprime mortgages ricochet through the financial markets, It has become apparent that some financial institutions with strong, well-integrated risk management programs skirted some of the worst damage.
Another risk-focused group, The Buy Side Risk Manager Forum, issued a report February that calls attention to "risk governance" as an important part of effective overall risk management.
The forum is made up of heads of risk management and chief risk officers from asset management and investment advisory companies.
The forum's report "Risk Principles for Asset Managers," states that risk governance refers to "the creation of checks and balances through organizational structure."
With the caveat that risk governance structures will vary depending on the size and complexity of the organization, the report provides five risk governance guidelines that lay the foundation for effective risk management:
The report cites a recent survey of mutual funds conducted by the ICI, which states that "the vast majority" of fund groups do not have chief risk officers, but that there is a "growing trend toward creating such positions."
At the same time, independent fund directors should assure themselves tat the risk management programs of the funds they oversee are adequate given their trading strategies and investment objectives, says Barbara Lucas, partner at Capital market Risk Advisors (CMRA), a consulting firm that works with various financial entities, including mutual funds, to assess risk.
CMRA worked with the Buy Side Risk managers Forum to draft the report n asset managers' risk principles. Lucas suggests that boards ask their management trams to look at the principles, which are not prescriptive, and assess where they stand versus the principles. They should then lay out their plan as to which ones they aspire and which ones are not.
(April 8, 2008)
|
INDUSTRY ALERT |
Global Investment Technology
Buy-Side Group Outlines Risk Management Best Practices
NEW YORK - Governance, investment and operations personnel in the securities and investments industry will have all to adhere to certain principles to best manage risk, according to the Buy Side Risk Managers Forum and Capital Market Risk Advisors (CMRA), a consultancy.
The forum, a group of heads of risk managements and chief risk officers from traditional buy-side asset and investment management firms, recently issued a set of risk principles within each of these three areas, titled "Risk Principles for Asset Managers."
"This piece is an important update, "says Leslie Rahl, President of the consultancy CMRA and a member of the forum. "Risk management is a journey not a destination. It's something that keeps going and keeps needing updates."
Governance risk principles concern organizational structure and oversight mechanisms, including the importance of independent controls, segregation of functions, senior management involvement in risk management and oversight and adoption of appropriate policies and procedures.
Investment risk principles relate to the need for risk controls at the portfolio level, and address market risk, liquidity risk, leverage, valuations and other aspects.
Operational risk principles concern risk occurring in the ordinary course of business and in disasters. These address identifying, assessing and monitoring such risks, setting up adequate systems and minimizing manual processes, managing counterparty credit risk and assuring business continuity in a disaster.
"These principles recognize the broader function for risk management, which is not just computing the numbers and tracking the limits, but the proactive functions that help firms optimize the relationship between risk and rewards," says Rahl. "The emphasis on governance has evolved. The focus on governance is clearly something that the regulators are looking for and where the industry is evolving. The principles should provide an important framework for best practice risk management. The discussion of risk governance and valuation are particularly critical in today's market environment."
(March 17, 2008)
Risk Management Decoded
By Liz Peek
"Risk management" has a nice ring to it. Not only does it suggest that a hedge fund team, for instance, has pretty much thought of all the things that could go wrong — it has also, bless its heart, managed those nasty surprises.
Leslie Rahl, founder and president of Capital Market Risk Advisors and a board member of Fannie Mae, has an excellent perch from which to view the unfolding of this latest debacle. According to her Web site, her company is "the preeminent financial advisory firm specializing in risk management, hedge funds, financial forensics, and risk governance."
Ms. Rahl graduated both from the Massachusetts Institute of Technology and its Sloan School of Management and was formerly head of Citibank's derivatives group. She actually understands all those complex formulas that are supposed to identify risk. Numbers are to Ms. Rahl as Cheerios are to the rest of us: uncomplicated and easily consumed.
Her take? "Risk management is all about thinking about two or three standard deviations from the mean. No one ever expects events to fall beyond that. Once in a lifetime events that fall outside that parameter have exponential, not arithmetic, consequences. Risk management is built around models, and models are built around assumptions. The models will work if things behave the way you model them to — but they never actually do. These events are somewhat expected, but we keep forgetting. You can't expect a computer model to anticipate changes. This is the big flaw — I keep reminding clients of this — that their assumptions are not the worst case."
"By definition, most risk people are young quants," Ms. Rahl said. Most, she said, do not carry their modeling back far enough to include similar events, such as the 1994 bankruptcy of Orange County, which she views as somewhat analogous to today's situation. "In 1994, the money funds broke the buck," Ms. Rahl said, referring to the unthinkable: a money market fund that experiences such credit issues with its portfolio that it no longer trades at a dollar. A similar deterioration in shortterm instruments occurred over the past two months, as a few money market funds got into trouble. The credit problems in the early 1990s stemmed from holdings of "inverse floaters" and the "kitchen sinks" — the names given to the leftovers of collateralized mortgage obligations after they had been sliced and diced and the higher-grade parts of the securities had been bought by savvier investors.
At the end of the day, we are reminded of the peril of investing in instruments so complicated that few could really understand them. "Even for me, who loves complex things, it's very complicated," Ms. Rahl said.
That's all we had to know.
(September 13, 2007)
Market volatility puts risk at forefront
By Jay Cooper
"In general, liquidity doesn't enter into the metrics used by pension funds," said Leslie Rahl, president of Capital Market Risk Advisors, a New York-based financial advisory firm specializing in risk management.
"In times like these, non-quantitative measures need to supplement normal risk reporting. The best defense is asset allocation, manager selection and effective risk due diligence," she added.
As part of their due diligence process, pension fund officials should also be asking managers how they value instruments like CDOs that do not trade on a liquid market, Ms. Rahl said. She said pension executives should be wary of managers who allow the trader to value those securities themselves.
(August 20, 2007)
Levered Bear Funds: A Peek into the Black Box
By Chidem Kurdas
"People forget that even when there's careful mark-to-market pricing, portfolio valuation does not necessarily reflect the actual price you'll get at execution," said Leslie Rahl, president of Capital Market Risk Advisors in New York. "There can be a huge difference between honest mark-to-market price and execution price."
(June 26, 2007)
