Risk managers are at times advising portfolio managers to take more risk, which – especially in the aftermath of large market events and subsequent de-risking – marks a milestone in the hedge fund industry’s move toward the integration of risk and return management.
That was one of the chief findings at the inaugural Risk Summit, which drew more than 115 attendees from asset allocators and managers, and featured a panel of financial experts including Richard Hoey (pictured), chief economist of BNY Mellon and The Dreyfus Corporation.
Summit panel moderator Tatiana Segal, head of risk management for Skybridge Capital, kicked off a discussion on how to achieve “The Alpha in Risk” by asking experts Benjamin Dunn, head of the risk management consulting practice for Alpha Theory, Katherine Macleod, risk analyst at Senator Investments, and John McClenahan, head of risk management for Calamos Investments, to define how risk management is now used to make better decisions and why.
Macleod opened with the comment that: "If you aren’t measuring alpha or drivers of alpha, you are bound to be leaving it on the table."
Dunn and McClenahan held that it is imperative to integrate risk management into the decision-making process to generate alpha and enhance returns. "We are in business to take risk," said Dunn, emphasising that "while it’s acceptable to take risk and experience a loss, it’s completely unacceptable to take losses on risk you could have measured but didn’t."
McClenahan added that alpha-generating opportunities present themselves when the risk process identifies situations where the market and the portfolio manager have differing views. Panelists agreed that the long-overdue convergence of risk management and the investment decision-making process has been, in part, driven by the demand for transparency.
"Investors are more sophisticated and well-versed in the uses of risk," says Dunn. This opens the door for creating a common dialogue to talk about the process for integrating risk analysis with trading decisions — position sizing, entrance and exit timing, and loss limits, for example.
Keynote speaker Hoey concluded the 2013 Risk Summit with his compelling outlook for the global economy, noting that – as with past market events – what one party sees as a risk, another views as an opportunity.
