GARP - Perspectives on Risk Management

GARP: As an Investment Risk Manager, what are the most difficult assets to work with from a risk measurement perspective?

JT: Equity and distressed debt strategies, in my opinion, are most challenging. A large chunk of risk in equity is idiosyncratic and security-specific in nature, so portfolios and products with similar risk characteristics (as quantified by models) and similar risk profiles can produce very different risk-adjusted returns and many possible outcomes, even in similar market conditions. Distressed asset strategies force a risk manager to not only think about financial and business risk, but also to think about a number of other qualitative aspects of risk, such as legal risk, structure and ranking in the capital structure, valuation methodologies, and other aspects of distressed debt restructuring.

GARP: What are some of the challenges you face when customizing risk management strategies for various investment strategies and asset classes?

JT: Based on the complexity of the investment strategy, asset class and the risk manager's past experience, the risk management perspective can vary a lot. For example, for risk strategies designed to preserve capital managed against a well defined benchmark, it's relatively easy to quantify the absolute and relative risk with a greater degree of confidence.

On the other hand, for a strategy with multiple asset classes, it's more complex. Correlation is dynamic; therefore, liquidity and leverage can also be very challenging and interesting from an investment risk perspective. So for strategies with multiple asset classes, it's not only important to understand the market risk, but it's also important to examine liquidity risk, counterparty risk and impact of leverage.

Different investment strategies and mandates have different return objectives, investment management expertise and risk tolerance. So it's equally important to understand the investment mandate, the portfolio manager's style and expertise, and the client's objective.

GARP: Have you seen any cultural differences in the way that investment strategies are treated?

JT: Emerging markets strategies pose a different set of investment risk challenges. Investment culture, market structure and capital market regulations have a significant impact on the risk profile of an investment strategy.

GARP: What is the key to creating effective and actionable risk reports?

JT: It requires a very good understanding of the relevant risk statistics and the appropriate level of granular details, in addition to knowing the target audience and intended use of the report. Portfolio managers, traders, asset allocators, asset owners, product managers, controllers and C-level executives all have very different and very specific requirements when it comes to risk reporting, so understanding all these requirements and nuances is very important.

GARP: How do you approach delivering risk information to clients?

JT: When it comes to delivering the risk information to the client, understanding the client's objectives and exact requirements is very important and sometimes challenging. Depending on these factors, the appropriate level of detail and type of analysis can vary significantly.

GARP: Are there areas where risk management software needs to improve?

JT: Most of the good risk systems have detailed VaR, tracking error, standard stress testing and historical scenario analysis features. Estimating expected shortfall, on-the-fly scenario analysis, benchmarking against a customized benchmark, CVaR and reverse stress testing -- those are much desired additional value-added features.

GARP: What does it means to be a global risk manager today?

JT: Being a risk manager is very challenging and exciting. In recent years, risk management has become even more integrated with strategic decision-making, governance and management accountability. Due to highly globalized, integrated markets and an ever-changing landscape, there is something new and challenging every day.

Financial risk management is an important function in the investment management business, and this is more true than ever in today's environment, where almost nothing is risk-free. When few returns are normally distributed and fat tail events are more common, there is a greater emphasis on improving risk estimates and managing risk.

GARP: What is the most important thing an educator can teach students about risk management?

JT: JT: Risk management is both an art and a science. Measuring risk is just one part of the equation. Risk management is not about avoiding all sorts of risks, but rather making sure there is adequate compensation for any risk taken by an investor or organization. If risk is taught with too much emphasis on quantitative methods, it may mislead students into thinking about risk as a number. Risk management is more about "approximately right" than "precisely wrong."

GARP: What is the one thing you wish you had known about the field when you began your career?

JT: Risk is measured and managed by people, not mathematical models. Liquidity and funding risk do not need to be modeled as a normal distribution. Recent market events have forced risk managers to re-think their assumptions about liquidity risk.

GARP: What do you think earning the FRM designation offers to someone like yourself who has also earned the CFA designation?

JT: There are a number of areas of risk management that are covered in greater depth in the FRM program than the CFA program, including counterparty risk/collateral management, regulatory risk, liquidity risk, model risk and risk capital. The scenario analysis and stress testing concepts covered in the FRM program are also very useful in portfolio risk management. Through the FRM program, I gained a better appreciation of counterparty risk/risk associated with derivative pricing and usage, and hedge fund risk management and due diligence concepts. The FRM program also covers the concept of sequential risk; i.e., if risk A happens, risk B is inevitable.

GARP: As a Certified FRM, can you offer some words of advice to those who are currently enrolled in the program?

JT: The FRM is one of the best and most globally recognized professional certifications in risk management, and a valuable investment both in terms of time and money. Even if you work outside of the financial industry at some point in your career, a lot of the concepts covered in the FRM curriculum have a wide application.

GARP: You have been an Individual Member of GARP for almost 10 years. How has membership proven to be of value?

JT: My association with GARP for all these years has been very fruitful. Participating in GARP's Chapter program provides valuable networking opportunities. The Continuing Professional Education program keeps me up to date with the latest developments in risk management, benefiting my professional development.