How to Learn to Love your Risk ManagerBarry SchachterGloria-Mundi, LLC

For presentation at the Drobny Macro Summer School

July 18, 2013

Evolution of a Risk Manager

PhD (Econ) Prof.

Regulator

Sell-Side Risk Guy

1987

1994

1997

1998

2000

2007

HF CRO

??

My Philosophy

Help you make more

money Help you take more

(good) risk

Philosophy at Work

InformationAnalysisDialogue

The 10 Risk Management Principles

Only take risks you like

Avoid unexplainable price action

Whatever can go wrong, will go wrong

Liquidity is a fickle friend

Exiting is the best hedge

Risk regimes change

Diversification is about factors not positions

Don’t be dogmatic about your views

Risk limits are your friend

You are the (best) risk manager

Risk Information: If You Don’t Understand It Don’t Use It

VaR: what’s it good for? absolutely…

Tool of convenience

Highly subjective

Uses Yardstick

relationshipsforecast

Data sensitive

VaR is Not the Most You Can Lose

Your Choice: Risk Mumbo-Jumbo or Risk Analysis

Use Marginal Risk to Build Better Portfolios

The insidious risk: liquidity

Crowded tradesHerdingContagion

Trading desk can help

Data Dependence Impact

Scenario Stress Testing:Worst Cases

Can’t find Black Swans this way

Reverse Stress Testing:How (not) to Lose $1MM (or more)

Hedges

Neutralize unwanted risk

Protect against gapping

Systemic risk management

Dialogue: relying on trust and partnership

Question assumptions

Provide a sounding board, give feedback

Be a coach

Cognitive Biases: when you are your own worst enemy

Confirmation biasAvailability biasRecency biasHindsight biasOverconfidence bias

P&L Attribution

What risk factors are driving P&L?

Do the risks and P&L line up?

What tendencies appear over time?

The Ultimate Risk Manager is You