Best Practice and Gap Analysis Assessments

CMRA is a thought leader in Best Practice. The breadth of our client base, (including hedge funds, money managers, funds of funds, investment banks, commercial banks, derivatives companies, institutional investors) as well as geographic diversity (We have clients on 6 continents) gives us a unique cross industry perspective on best practices.

Selected Assignments in Best Practice

• Advised the Buy-Side Risk Managers in the creation of "Risk Practices for Asset Managers", published February 2008.
• Co-chaired the IAFE's Investor Risk Committees Best Practices group
• Conducted a Fund of Funds Best Practice review for The Alternative Investment Management Association (AIMA)
• Conducted a multi-client study on buy-side risk management.
• Benchmarked the practices of hedge funds, money managers, fund of funds, investment banks, commercial banks, derivatives companies and institutional investors
• Served as Technical Advisors and Coordinators to the Risk Standards Working Group in the development and release of the Risk Standards for Institutional Investment Managers and Institutional Investors
• Conducted an Economic Capital survey of 40 financial institutions.
• CMRA has written expert reports and testified on best practices in derivatives, repos, MBS and governance

Recent & Upcoming Speeches re: Best Practices

October 2008

June 2008

April 2008

March 2008

February 2008

Selected CMRA in the Press re: Best Practices

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)

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)

Hidden risk: Investors skim over question of fund valuation
By Christine Williamson

"With so much money rushing into hedge funds, people are very anxious about preserving capacity and that's when they begin to cut corners, when it becomes more of a seller's market. But it's the fiduciary responsibility of (institutional) investors to make sure that their fund-of-funds managers are asking all of the right questions about the process of due diligence and portfolio construction, including valuation. It's a bad assumption to think that all fund-of-funds companies are conducting the right level of analysis on the hedge funds they use," said Leslie Rahl, president and chief executive officer of Capital Market Risk Advisors LLC, New York, a hedge fund risk analysis firm and consultant.

"There is enormous interest in this area, but there is still a lot of education to be done of both investors and managers," said CMRA's Ms. Rahl. ``There are a lot of nuances that people are not fully comprehending. Questions have to be very carefully tailored for each kind of strategy. Valuation is an issue any time you have an instrument that's not traded in a transparent, liquid market. Intelligent, well-meaning people will often price the same securities very differently."

The Investor Risk Committee of the International Association of Financial Engineers, Washington, for example, released a white paper on hedge fund portfolio valuation recommendations in early June. Ms. Rahl has served on the IAFE committee that worked on the recommendations for the past two years and co-chaired it last year.
(July 12, 2004)

AIMA Releases Fund of Funds Guidebook
By Susan L. Barreto

The Alternative Investment Management Association Ltd. has released the results of the research on hedge fund of funds it commissioned in 2001, complete with commentary from practitioners.

A 96-page book, "A Guide to Fund of Hedge Funds Management and Investment," covers a broad range of topics including risk management, transparency, hedge fund selection and benchmarking, liquidity, fees and due diligence.

Capital Market Risk Advisors, New York conducted the research, parts of which have been released throughout the year. CMRA coordinated and co-edited the guide that includes three comprehensive surveys of institutional investors, hedge funds and hedge funds of funds completed in the last year.
(October 21, 2002)

IRC Surveys Industry on Transparency and Valuation Practices
By Susan L. Barreto, Senior Reporter

Members of the International Association of Financial Engineers' Investor Risk Committee are conducting surveys in preparation for a January meeting with regulators, the results of which will be discussed at its upcoming meeting.

At the meeting, officials plan to discuss the results of the survey and the first draft of the reporting requirements for hedge funds as divided up by strategy, said Leslie Rahl, who is the U.S. chair of the IRC.
(November 25, 2002)

Preliminary findings from a study of funds of funds by Capital Market Risk Advisors (CMRA) in conjunction with the Alternative Investment Management Association show that institutional investors are still nervous about the lack of transparency and the high risk involved in investing. The study's early findings also show that fund managers and fund of fund managers are hesitant to embrace the idea of best practices or reporting standards. The CMRA study is scheduled for completion and release in August of 2002.

"There is a tug of war going on," said Leslie Rahl, president of CMRA, who shared these preliminary results during a panel on transparency and disclosure at the 9th Annual Hedge Fund Forum held in New York this week. Managers in the alternative investing world are typically anti-bureaucracy and anti-authority, she added. And investors are inclined to demand adherence by managers to "best practices," a full understanding of risk in each fund, and funds with stable infrastructure and investment processes that are not reliant on a single manager.
(June 6, 2002)

Fair value pricing can be fairly unfair: Money managers rely on little price info

What is fair value when it comes to the price of a portfolio?

Scarcely any agreement exists on the issue among mutual funds, hedge funds, funds of funds and traditional money managers, according to a study by Capital Management Risk Advisers Inc. in New York.

More than 60 financial institutions - with combined assets of about $2 trillion - participated in the study.

It's an issue that doesn't get much attention, but it is one that does have an affect on portfolio's returns, says Leslie Rahl, president of Capital Management.

"If you don't even agree on what the portfolio is valued at today, how can you agree on what the risk is that it might lose money tomorrow?" says Ms. Rahl.
(July 30, 2001)