Institutional Investors

CMRA has worked with many plan sponsors, endowments and foundations on a wide range of issues from risk budgeting to creation of investment policies to manager selection to due diligence. Ms. Rahl was a trustee of the $10B MIT Endowment and a member of the Advisory Board of the $120B NYS Common Retirement Fund.

Mrs. Rahl is the author of Hedge Fund Transparency: Unravelling 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 for Institutional Investors

• Advised a sovereign wealth fund on valuations for an emerging market hedge fund
• Advised pension funds, endowments and investment advisors about portfolio structure, risk analysis (absolute and index tracking risk), and security evaluation and selection in all mortgage products, corporate bonds, CDOs, CLOs, yield curve analysis, interest rate and credit derivatives
• Evaluated the reasonableness of an intercompany transfer of MBS/ABS for several pension plans
• Conducted an interactive risk appetite discussion for a board of a large pension plan, and used the results to create a customized risk appetite study
• Valued complex structured products in counterparty bankruptcy for several SPVs
• Advised on the interpretation of ISDA agreements
• Advised several pension plans on counterparty risk management
• Co-chaired the IAFE’s Investor Risk Committee Best Practices Group
• Advised many institutional investors on due diligence for alternative areas
• Orange Country - Analyzed the circumstances surrounding orange County’s margin calls (pre-bankruptcy) and blew the whistle (see WSJ article)
• Performed comprehensive risk assessment and reviewed risk management policies and practices for a variety of pension funds, endowments and foundations
• Performed due diligence reviews and “risk diagnosis” on hedge funds, fund of funds and traditional asset managers on behalf of institutional investors
• Advised a sovereign wealth fund on risk governance structure
• Advised multiple institutional investors on valuation of complex derivatives and CDO’s
• Reviewed and recommended enhancements to risk reporting to the Boards of multiple Institutional Investors
• Trained boards of several public pension funds in risk budgeting techniques
• Developed derivative guidelines for the overall fund and its investment managers for several pension plans
• Advised several clients on Chief Risk Officer (CRO) roles, responsibilities and selection
• Drafted and reviewed risk management policies and practices for numerous institutional investors
• Valued a portfolio of complex structured investments
• Advised numerous intuitional investors on valuation policies and procedures
• Conducted a multi-client study on buy-side risk management
• Updated internal and external risk management policies for several institutional investors
• Review and recommended enhancements to board reporting for multiple institutional investors
• Evaluated the VAR implementation and reporting to the Board of Directors for one of the largest non-US. plan sponsors
• 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

Services for Institutional Investors

Services for the financial community include:

1. Strategy
   • Investment Policy Review
   • Risk Budgeting
   • Risk Appetite and Attitude Statements
   • Asset Liability Management Advisory
   • Evaluation of Investment Organizational Structure
   • Manager Due Diligence, Selection, and Selection Process Review
   • Planning for Asset Class Expansion
   • New Product Risk Assessment
   • Merger and Acquisition Support
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2. Risk Management
   • Risk Governance
   • Risk Advisory
   • Risk Measurement Systems
   • Risk Due Diligence
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3. Investment Operations
   • Integrated Performance/Risk Measurement and Attribution
   • Investment Management Structure Review
   • Investment Policy Setting Process for Clients
   • Asset Management Process Review for Fixed Income, Equity, and Alternative Investment Asset Classes
   • Derivative Program Review
   • Alternative Investment Strategy Review
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4. 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
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Recent and Upcoming Speeches for Institutional Investors

October 2008

June 2008

Relevant Publications

The biggest "CIO" Risk - Alpha" Risk Manager" (complex, illiquid, opaque) - AIMA Journal - Feb. 2008

Risk Management An Evolution Forum "Gut to Quant to Wisdom" - AIMA Journal - Sept. 2005

A New Approach to Risk-Adjusted Asset Allocation for Hedge Fund Investing - AIMA Journal - Sept. 2003

Managing the Risks of Alternative Investment Strategies Chapter 8 - Due Diligence - Euromoney Books - Fall 2003

Hedge Funds: A Definitive Overview of Strategies and Techniques Chapter 9 - Risk Management - John Wiley & Sons - Aug 2003

Beyond the Basics - Due Diligence - 2003 HedgeWorld Compendium - June 2003

Hedge Fund Transparency-Unravelling the Complex and Controversial Debate - ICMA - Jan. 2003

Safety First - ICFA/AIMA Investment Supplement - Dec 2002

Institutionalization of Hedge Funds - Institutional Investor - Fall 2002

Different Perspectives of Hedge Fund Transparency - Alternative Fund Services Review - October 2002

The Journal Interview - Spaulding Group, Inc. - Summer 2002

Performance Measurement & Attribution - Investment/Financial Services Review - Feb. 2002

Survival After The Blaze - AIMA Newsletter - Apr 2001

Risk Budgeting, A New Approach to Investing Edited by Leslie Rahl - Risk Books - 2000

CMRA in the Press re: Insitutional Investors

Opinions Diverge on Who Calls Valuation Shots When Liquidity is Scarce
Martin de Sa'Pinto, Senior Financial Correspondent

MONTE CARLO, Monaco - The liquidity crunch brought home to many investors, portfolio managers, service providers and prime brokers how sharply valuations can diverge when a portfolio becomes unexpectedly illiquid. This was particularly true for highly leveraged portfolios that, as the result of not-always-sharp fluctuations in the prices of securities, found themselves facing margin calls and forced to unwind positions rapidly.

The complexity of the security in question is clearly an issue, and when there is a lack of consensus on valuation methods, different constituencies will often make a strong case for completely distinct methods that can produce widely diverging valuations.

This was the basis for a panel discussion at the Global Alternative Investment Management conference in Monaco on June 19 was moderated by Henny Sender, international financial correspondent at the Financial Times.

"Valuation and transparency are among the hottest topics facing hedge funds and investors today," said Ms. Sender in her introduction. "How quickly can valuations change? If you don't have a good sense of valuation you cannot manage the risk of your positions."

In such circumstances, "I was a diehard advocate for mark-to-market, and I still believe it's the lesser of evils, but there are times when model-based pricing might make sense," said Ms. Rahl. This would of course imply that the model-based methodology was favored over mark-to-market because either market prices were stale or unavailable, or the relationship between the underlying and the proxy was weak. "The option of using such a valuation methodology would require strict checks and balances within a fund," she said.

"Marks on the collateral don't necessarily represent the price at which a trade can be unwound," said Ms. Rahl. "In some situations we have seen the exact same trades with two different counterparties being unwound at vastly different prices."

Ms. Rahl said relevant documentation, including research reports, broker quotes and screen shots, should be printed out and kept on file so that it is at least available in the case of a dispute.
(July 2008)

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)

 
Debtwire
Citibank responds, sues for breach of contract in credit default swap case
By Danielle Reed, New York

Citibank filed a response 23 April and countersued for breach of contract in its ongoing court battle with a hedge fund over a credit default swap.

Whatever the outcome of this particular case, the mere fact that such issues are being litigated highlights a source of concern to longtime derivatives market participants: Namely, the growing participation of hedge funds in the CDS market. "One of the things that has been of great concern to me for a long time is [the] many new entrants to the credit default swap market, especially hedge funds who have not cut their teeth on less complex over-the-counter derivatives...before taking on large sized positions in CDS," said Leslie Rahl, founder and president of Capital Market Risk Advisors. A pioneer in the derivatives market, Rahl said she is "pro-derivatives" but fears that "some of the newer players don't fully understand the differences between a liquid, transparent securities market and the world of over-the-counter derivatives."
(April 28, 2008)

Don't Trust the Wall St rally
By Bethany McLean, Editor at Large

Up till now, all eyes have been on the losses that are hitting the financial sector from the acronym soup of new instruments such as CDOs and SIVs. Everyone is scared, and rightly so of the MUB (Monster Under the Bed) that might be lurking in supposedly safe havens.

The last decade saw the explosion of securitization – the carving up and redistributing of risk-the boom in hedge funds, and the private equity mania.

In a paper published in the fall of 2005, risk management gurus Leslie Rahl and Barbara Lucas of Capital Market Risk Advisors, noted that in the past decade, a lot of things have happened that aren't supposed to happen, from the interest rate hikes of 1994 to the 1998 collapse of LTCM to the 2001 terrorist attacks. Or as the authors put it, "once-in-a-lifetime events seem to occur every few years."
(March 23, 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)

Amassing your governance capital
By Alice Korngold

On a nonprofit board, you will work with others to develop the organization's greater vision, revenue model, and case for support. Leslie Rahl, president of Capital Market Risk Advisors, points out that "you deal with matters of ethics that transcend what you learned in business school. You learn the dynamics of being part of a team of peers, of knowing when to defer to others, especially in situations where you are also ultimately responsible and accountable."

Rahl was asked to join the board of Fannie Mae in 2004. Her firm specializes in risk management, hedge funds, financial forensics, and derivatives, and she has authored books on hedge funds. She has an undergraduate degree from MIT and an M.B.A. from MIT's Sloan School.

Clearly, her business expertise qualified her to serve on the Fannie Mae board, but it was her nonprofit board experience that distinguished and elevated her as a candidate. "When they were interviewing me for the position," she explains, "the Fannie Mae board members spent a great deal of time asking me about my work on the board of 100 Women in Hedge Funds and my experience in chairing its philanthropy committee in particular." She adds, "Once I was identified for the Fannie Mae board, and my business qualifications were dear, my having served on a nonprofit board was definitely considered a plus."

Business background may open the door, but leadership experience gets you into the boardroom. Rahl was recently elected to the board of CIBC, a leading North American financial institution Hedge funds vary widely in the quality of their internal controls and disclosures, said Barbara Lucas, a partner at Capital Market Risk Advisors, a financial advisory firm. When it comes to the quality of hedge fund operations, "we see the good, the bad, the ugly and the indifferent," said Lucas, a longtime securities attorney. "It's really all over the place."
(Third Quarter 2007)