Head Of Market Risk Video

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The first of a two part article

Fund managers,whether they be equity or bond traders, know all too well that returns are notsimply a result of their asset selection prowess. Many external factors come into play. But what are the issues facing the professional money manager. Not all fund managersanalyze their market risk. This isoften explained as a lack of education and a failure to understand themitigating solutions for off-setting risk.

Market risk isdefined as "the unexpected financial loss following a market decline dueto events out of your control." Stock or bond market volatility or market reversals can be the result ofglobal events happening in far flung corners of the globe. Top analysts and fund managers simply do nothave the resources to crystal ball gaze and predict those events.

Examples of several majorunexpected events that sent shock waves throughout the financial community havebeen:

- 1982 Mexican Peso devaluation;

- 1987 stock market crash knows as "Black Monday";

- 1989 USA Savings and Loan Crisis;

- 1998 Russian Ruble devaluation;

- 1998 $125 billion collapse of Hedge Fund Long Term Capital Management;

- 2006 collapse of Hedge Fund Amaranth with losses of $5.85 billion.

In 1994 Bank J.P. Morgandeveloped a risk metrics model known as Value-At-Risk or VaR. While VaR is considered the industrystandard of risk measurement, it has its drawbacks. VaR can measure total dollar value of a funds risk exposurewithin a certain level of confidence,usually 95 or 99 percent. What itcannot do, is predict when a triggering event will occur or the magnitude ofthe subsequent fallout. For somecompany's and funds, a steep decline or protracted recession can bedevastating. Even forcing someun-hedged firms into bankruptcy. Atriggering event can have a ripple effect forcing people out of work andeconomies into recession effectively putting more people out of work. No person and no economy is immune.

If you own a mutual fund,chances are your fund is un-hedged. Until recently, mutual fund legislation prevented mutual funds fromhedging. Many jurisdictions haverepealed this rule however mutual fund managers have been slow or decided tocontinue with "business as usual". The reason is that most investors of mutual funds are unsophisticatedand do not understand the hedging process and may re-deem their money from aninvestment strategy they do not understand.

Hedge funds on the otherhand do not have these restraints. Investors are more sophisticated and are more open to the nature ofhedge fund strategies. Some of whichare not disclosed due to a fear of piracy by competing hedge fund managers.

Risk reductionsolutions are not complicated but do require the services of a professional whounderstands the process. This is therole of a Commodity Trading Advisor, also known as a . While most CTA's arehedge fund managers, few specialize in risk management analytics. The focus of a risk manager is on theanalysis of solutions to reduce or eliminate market and / or operationalrisk. No matter the role, all CommodityTrading Advisors are specialists in the derivatives market.

The first step is the valueat risk calculation to determine a funds risk liability. A risk mitigation strategy known as a hedgeis then implemented. After all,identification of one's risk is only beneficial if a solution to off-set thatrisk is put into place. Hedgingrequires the use of derivatives, either exchange traded orover-the-counter. These can take manyforms. The most commonly used hedginginstruments are index futures, interest rate futures, foreign exchange,exchange traded commodities such as Crude Oil, options and SWAPS.

A more detailedexplanation of derivatives and hedging will be discussed in our nextarticle. Now that we've identified aneasy solution for your market risk worries, the implementation of the rightstrategy can be as easy as a call to a qualified and registered CommodityTrading Advisor.

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