U.K.- based Alternative Investment Management Association and New York-based Capital Market Risk Advisors have teamed up to research issues facing institutional and high-net-worth investors who are looking to put their money into hedge funds or fund of funds. Leslie Rahl, president of CMRA, says her firm is currently conducting a survey among top hedge funds. fund of funds and investors on issues as diversification, transparency, risk management, performance attribution and liquidity. Rahl said the company is also planning to hold individual and round table discussions with leading hedge fund and fund of fl officials over the next few months to discuss issues they face when raising capital from institutions and HNW investors.

AlMA and CMRA are hoping that by talking with officials from the alternatives industry they can construct important information about alternatives investing for investors - particularly pension plans, foundations and endowments. Rahl added that AlMA and CMRA are looking to provide comprehensive information about the differences between investing in stand-alone hedge funds and the more complex fund of funds. She said the research will also include information on offshore hedge funds and fund of funds.

In light of the recent tragedy of the World Trade Center, Rahl said the firm will devote time to research the effects the disaster may have on the alternative investment industry. Rahl said that all participants receive completed research as well as information about how they fit into their particular peer group. She noted that no names will be published and that the information gathered will be made available to all members.

(September 25, 2001)

Meanwhile, a Capital Market Risk Advisors (CMRA) survey of hedge funds, funds of funds, mutual funds and traditional money management firms found that fair-value pricing estimates for funds positions can vary by up to 44%. The large margin for error has prompted concerns about the effectiveness of value-at-risk models.

(July 20, 2001)

Mark-to-market, leverage and liquidity risks are key ingredients to blow-ups

In analyzing hedge funds, investors should go beyond simple performance and Value at Risk analysis to obtain as much detail as possible about fund operations and transactions, said Capital Markets Risk Advisors president Leslie Rahl at Infovest21 '5 Think Tank Symposium on September 7. Mark-to-market, leverage and liquidity risks are key themes that ran through fund disasters over the last ten years.

Rahl cited Askin's Granite funds which lost close to $600 million in 1994 as the first example of a fund not marking- to-market and making assumptions as to what prime brokers were willing to do given the extent of haircuts. "Sometimes it makes more sense to settle a lawsuit," she said. Rahl responded to reports that investors finally received settlement in early September from prime brokers that were sued by the bankruptcy court's litigation advisory board for allegations that the funds' securities had been liquidated at commercially unreasonable prices, substantially below market value.

"One size fits nobody ," Rahl said of analyzing risks among different hedge funds. Risk itself is not bad, only uncompensated and unanticipated risk is bad for investors. Investors should optimize risk by spending it efficiently, keeping one particular element of market risk low at the expense of the overall risk profile of the portfolio. VaR does not address cumulative losses or present a worst-case scenario but it is valuable as a probabilistic measure of potential losses. In providing an incomplete list of 51 potential risks that a hedge fund could face and 40 common risk measures, Rahl suggested a multidimensional approach that includes stress testing.

(September 11, 2001)

Different pricing approaches used by hedge funds create significant valuation differences. Hedge funds have great latitude in this area, says Capital Market Risk Advisors, a financial advisory firm based in New York.

In its just released survey...

(July 10, 2001)

AIMA Conducting Industry-Wide Surveys for Fund of Funds Research

New York-based Capital Market Risk Advisors is coordinating the project and is contributing their efforts for the research project.

“We are looking at issues from a variety of perspectives, “ said Leslie Rahl, president of CMRA

CMRA will be conducting a series of roundtables and will be working with industry data providers to add more depth to the research.

(September 21, 2001)

BANKS SLOW ON LIQUIDITY RISK

A recent survey of financial institutions has found that most are concerned with credit risk but are not accounting for liquidity risk...Many of the firms are also not applying risk-adjusted methods to allow for a more efficient distribution of capital...the survey which was conducted by Capital Market Risk Advisors...”It’s purely based on attitude whether they use the risk-adjusted return method or not,” says Leslie Rahl, president of CMRA

(June 2001)

New York based consultancy Capital Market Risk Advisors (CMRA) is developing a database it says will allow investors to apply value-at-risk to portfolios with investments in merger arbitrage hedge funds.

CMRA says the database will allow more accurate analysis of the stock price behaviour of two merging companies after a merger announcement and, separately, if a deal falls through. The database will also help portfolio managers diversify away any market risk in the deals through better knowledge of the correlations that merger events have across debt and equity markets and their sub-sectors.

(April 2001)

The largest international consultants are under threat from specialists. In the field of credit risk management, in particular, risk consulting boutiques such as Capital Market Risk Advisors (CMRA) are making inroads into a client base that traditionally has been the prerogative of strategy and management consultancies. CMRA’s client list already features giants such as Merrill Lynch and UBS... (March 2001)

Risk Budgeting – A New Approach to Investing

Edited by Leslie Rahl
Risk Books
349 pages, £80
IBSN 1-899-322-94-4

Leslie Rahl's absorbing book, Risk Budgeting - A New Approach to Investing, is a compilation of views from an accomplished list of authors, each of which has contributed substantially to the field of risk management in the past decade. This is one of those rare financial texts that draws the reader in starting with one (of many) thought-provoking sentences of the first chapter – "There has been at least one major market that has moved by more than 10 standard deviations every year for the past 10 years" – right to the last page.

(May 2001)

“It’s my sense that these differences [in pricing methodologies] aren’t by choice but a result of a lack of standard setting and it’s difficult to know who should set those standards,” said Leslie Rahl, founder of CMRA.

The survey queried 60 institutions in the hedge fund and mutual fund industries, representing about $2 trillion in assets.

(July 13, 2001)

Leslie Rahl, founder and president of Capital Market Risk Advisors

Having structured the first cap, collar and floor options, Leslie Rahl is one of the most influential women in risk management. From heading up Citibank's derivatives group to starting up her own business Rahl has got oodles of stories on risk management.

Rahl was one of only two senior vice-presidents worldwide working at Citibank in the early 80s. She says that I they were not allowed to go into the 'senior officers' dining I hall. "But the chairman's wife, Kathy Wristen [Walter Wristen was chairman then] would invite me over for luncheons," she says.

She says that she has found women's intuition to help her a lot throughout her career. "No one would think it was a male dominated industry if they came into my office." It is decorated with pink chairs and flower arragements.

"Being a good risk manager requires more than good quantitative skills. It requires good communication skills and strong instinct. Quantitative skills are stereotypically not considered a woman's quality. Communication is though." Rahl fancies herself as a 'risk shrink' and 1- 'empathic hand holder'. .

(Aug/Sept 2001)

"We're just starting to see the world of distressed securities realize that some of these clauses that many thought didn't matter actually matter a great deal," says Leslie Rahl, president of Capital Market Risk Advisors. "Xerox in particular may be a good example of documentation language that was intended to protect counterparties in a downgrade situation, but now may have unintended negative consequences if these clauses actually get triggered." Rahl acknowledges that credit trigger levels need to be precise, but she also worries that they introduce a certain amount of systemic risk. "Given the proclivity of rating agencies to downgrade whole industry sectors at the same time," she says, " credit triggers are the one thing in my mind that could cause systemic risk and bring on required knee-jerk reactions." (January 2001)

“Many people are so exhausted by [creating risk numbers] that they stop and never do what the whole process was really designed to do” -CMRA (March 2001)

Last month, New York-based consultancy Capital Market Risk Advisors released a survey on economic capital allocation. It reported the economic capital allocated by large global banks to operational and other risks (but not market risk or credit risk) ranged between 5% and 60%.

(June 2001)

In Brief: Bill Credit Their No. I Risk Fear

WASHINGTON - Bankers say credit, economic capital, and systems risk - in that order - are their top three risk management concerns.

Capital Market Risk Advisors, a New York financial advisory firm specializing in risk management, surveyed 40 bankers worldwide on their risk management concerns and thoughts about economic capital.

The firm found emerging-market and investment banks were more gravely concerned about integrating market and credit risk than did non-emerging-market foreign banks, U.S. banks, and other financial institutions.

Of the banks surveyed, 65% said they use internal models for market-risk regulatory capital and 35% use the Basel standardized measurement method. Of those using the Basel method, 69% said they plan to move to internal models. None of the emerging-market banks said they use internal models now, but 71% said they plan to. Most of the major banks and investment banks said they are currently using internal models.

Sixty-three percent of all bank respondents said that if the Basel Committee on Bank Supervision would let banks use their own credit risk models now, they would not yet be ready to make the switch.

(May 29, 2001)

Others such as Capital Market Risk Advisors Inc., New York, are serving as intermediaries between hedge funds and investors, evaluating risk exposures without giving proprietary information. “What I believe is when (investors) say they want transparency, what they really want is some sort of predigested analysis that highlights the risks, the changes (in exposures),” said Leslie Rahl, president.

The problem, she added, is that managers calculate risk levels differently. There are seven or eight ways of calculating value at risk, a widely used risk measure. And she doubts there ever will be an industrywide standard, noting that banks, which are highly regulated, have failed to coalesce around a single standard.

(November 26, 2001)

Some firms find other ways to attract good candidates in the tight job market. Capital Market Risk Advisors, a 15-person New York consulting firm, said the company has sought out nontraditional workers. Consulting, they say, because it can be less structured than other corporate environments, can offer workers flexible hours and the opportunity to keep sometimes-lucrative side jobs

(February 5, 2001)

In the wake of problems at Manhattan Investment Fund and at Heartland Advisors and the new SEC guidance on “fair value” pricing for funds, CMRA conducted an NAV/Fair Value Practices survey. Participants included hedge funds, fund of funds, mutual funds and traditional money managers. Perhaps one of the most

USA: WORLD BONDS-Reality intrudes into a risk managers’ world. NEW YORK, Oct 26 (Reuters) -With the unlikely becoming more likely with each passing day, managing risk in bond and other asset portfolios at financial firms is no easy business. Out-of-the-blue events wreaking havoc in financial markets have hit in recent years, from the Mexican peso devaluation in 1994 and the Asian crisis in 1997 to the Russian debt default and resulting meltdown of a giant hedge fund in August 1998. Then came the hijacked plane attacks of Sept. 11 that destroyed the World Trade Center and parts of New York's financial district, shutting down U.S. markets and causing logjams in complex systems that left many trades unsettled. This prompted the Federal Reserve to pump billions of dollars into a creaking financial system. These events tested the fundamental premise of risk-management models aimed at reducing risk, which are based on the assumption the future will look very much like the past. "We better get used to the idea there's going to be a once-in-a-lifetime event every couple of years," said Leslie Rahl , president of Capital Market Risk Advisors, at a recent bond market conference on risk management. (October 26, 2001)

SECURITY VALUATION PRACTICES VARY

Capital Market Risk Advisors issued a survey of the fair value practices at numerous financial institutions. For example, the practice of using one dealer quote varies significantly depending on whether the firm advises private accounts, hedge funds and mutual funds.

(August 1, 2001)

NEWSLETTER

Where in your home is your smoke alarm? Chances are good that you know exactly where it is, and we think chances are also pretty good that when it goes off at 2 am, you'll wake up completely confused and have no idea what to do. Leave the room, jump out of the window call someone, yell? In today's financial world, this is the way a lot of businesses work as well -we know where the risk management smoke alarms are, but we do not really know what we would do if they ever went off. (April 2001)