A day in the life of the modern investment risk adviser would surely frighten the living daylights out of those who went before in a similar role. In ancient times - that is, pre-Big Bang in October 1986 - the job could involve picking a stock or two to suit a client.
The stocks in question would then be locked away and the key stored somewhere safe for 40-50 years before being cashed in on maturity and the proceeds returned to the end investor, less of course several decades of fees.
Six impossible things before breakfast
Today it is all algo-driven high frequency trading, risk-on and risk-off and believing six impossible things before breakfast. The world before HFT and the global financial crisis looks positively bucolic, arcadian and idyllic.
Take a look at this recruitment video from Goldman Sachs in 1985 for a hint of the good old days. Though, it has to be conceded, there do seem to be a goodly number of people at work at 07.10h. Maybe that was seen as slacking even then.
Apart from anything else, look how long it is at 13m 41s and how slow it is. And how white. Does this bear any resemblance to current reality for the modern investment risk adviser working at Goldman Sachs or any of its rivals today?
Those green screens are...
For younger readers, by the way, those green screens are Reuters and Telerate machines showing where the Treasury market was trading. For older readers, see how many banking luminaries you can spot.
The job description for the modern investment risk adviser sounds terrifying to someone whose international banking career began in September 1979.
Explaining the different stages of risk assessment in brief
- identify your risk
- assess your risk
- monetise your risk
We are all investment risk managers now
The hard fact is that we all need to be our own investment risk managers today. As the FCA's recently published paper on the UK asset management industry reminds us, over three quarters of UK households are saving for, or receiving some kind of pension.
This includes over 9 million people saving for retirement through defined contribution (DC) pension schemes and approximately 1.4 million savers currently building up pensions in defined benefit (DB) pension schemes.
There are also around 11 million savers with investment products such and stocks and shares ISAs. These all rely on the services provided by asset management firms, whether directly or indirectly.
Investor bears all the risk
But the investor bears virtually all the investment risk. Are we qualified? No. Read the extensive job description replicated below and there is little doubt that you will find yourself nodding in agreement, briskly and often.
A typical day
What does the typical day in the life of an investment risk specialist involve? One such creature, who asked not to be identified in any way shape or form, replied as follows.
That very much depends, based on
- the underlying investment strategy
- exactly what is done each day every day versus
- what is done ‘up front’
- and then only revisited when there is a big enough market swing to throw off net asset value and possibly alter the risk level of that particular security
Some days there is nothing
Some days there is absolutely nothing that needs to be done to re-steer ‘risk management’ for a portfolio. Another day might include for example the second stage analysis of a potential addition to the portfolio.
In this case, an investment risk specialist might run an 83-factor forensic analysis (of which clients and accredited investor prospects will be aware). This is then used to assign his firm’s risk/return grading/ranking for a stock.
Those that make the top 20% are potential longs and those in the bottom 20% are potential shorts. After this, day-to-day monitoring of potential change in risk at the company-specific level is less work than goes into the front end.
In contrast, he notes, there are some top down macro managers, who do short-term trading. They will follow event-driven, breaking news and do ‘turn on a sixpence’ switching in day-to-day trading.
That’s a dramatically different way to run a portfolio, says our masked adviser.
Billy enjoys the job
M Damian Billy, Founder/CEO of Chicago-based Econophy Capital Partners LLC (pending name change to The Econophy Group) says he enjoys a job that gives him the freedom and flexibility to explore inventive strategies to achieve the company's goals.
He says his focus is on creating a hybrid approach to private equity that is vastly different from the standard 75-year-old model. “We keep asking ourselves how do we distinquish it as equity stakeholders and as a product-offering speciality firm,” he says.
From a helicopter view he focusses on the financial technology) evolution to source select companies for taking an equity stake. The aim is to build a platform of five to seven companies with technology applications that are natural valuation catalysts.
Organically grown preferred
“We prefer organically grown ventures/companies that are not previously funded by venture capitalists and whose current C-level executives are forward-thinking individuals,” he says.
From a worm's-eye view, the process requires a combination of objective perspectives related to assessing operating numbers. The goal is to set an enterprise value that makes sense from a fundamental perspective, not an illogical current market environment metric.
Of equal and many times greater in scope is to determine the culture of the firm. Are its executives willing to embrace change? Does it function as a team or work in a silo mentality? Does the next C-level promotion come from within or is an outsider required?
A question of pragmatism
What is the method of allocation that recognises the success to date, yet provides an incentive to achieve 3X-5X original investment over the next five years? Is the PE candidate pragmatic regarding performance, market outlook, competition, regulatory issues, etc.
A typical day starts at 6:30am checking emails, doing some research, preparing for conference calls, arranging conference calls or related activities, discussing current tasks with staff, looking at what options we have for a number of “what if” market scenarios.
Many times I am up at 5:30am to begin my day, when working from my home office. Usually by 8am or sooner when at the office. I reply immediately to those emails requiring an answer. I believe it is important to prioritise your time by respecting the needs of others.
All of my reading is done online. I have not sat down to read a paper in years. Included are Bloomberg, Zero Hege, UK/EU industry blogs and/or publications, Linkedin postings, PE-specific journals and glance through several news sites for any developments.
The working day is structured so eveyone can optimise their productivity without losing momentum by having unnecessary meetings. Lunch? There is no set time to take it, just when demand for my time is less. Many times it is taken at my desk.
Our risk assessment and monitoring process is continual. The fintech space and the global financial markets in general are in constant flux. While tech apps are of interest, our question revolves around how can it benefit what our Series I-V platform companies are engaged in for their own growth purposes.
Since our hybrid PE features a number of asset class integrations and cross usage, we evaluate many markets and influences (direct & indirect) to determine the risk/reward outcome. It is necessary to apply foresight and that is done so you can react accordingly.
The birth of risk advisers
The “birth” of risk management in the financial sector was in 1979 with the Savings & Loans crisis in the US banking sector, notes Dr Sotiris Staikouras, CASS Business School senior lecturer in banking & fnance and course cirector of BSc in IFRM, RAI and REFI.
The markets have changed significantly since then. The reduction of trade barriers between countries, the creation of economic unions and the subsequent globalisation of financial institutions have had an enormous impact on the industry.
Dr Sotiris Staikouras, CASS Business School. Photo courtesy of Cass Business School
From simple to sophisticated
Institutions have changed the way they operate, and the role of risk managers has left the “simple” balance sheet monitoring. It has been elevated to sophisticated quantitative techniques and hedging strategies.
The role has been revised regularly to meet the growing needs for internationalisation, interlinked markets, new financial services, complicated investment and financing productsand complex regulations.
As well as regulations for the ever complicated and intertwined financial sector. The risk managers of today are required to have an extensive understanding of the markets in which they operate.
Understanding hedging a must
Apart from the obvious knowledge of the fundamentals of risk management such as interaction of various risks (e.g. interest rate risk and foreign exchange risk), they must understand hedging instruments and policies and limit frameworks.
Successful risk managers are now also required to understand balance sheet constraints, compliance monitoring, stress-testing, sovereign exposures, contingency planning and product valuation among others.
How much on-the-job training do his students get?, we ask. “Our students, during their specialisation, are taught and examined thoroughly in over 10 subjects directly link to investment and risk management,” he answers.
“Our students are also encouraged to participate on our three-day and/or five-day professional courses. We run these in conjunction with Amplify Trading to give participants a thorough understanding of how financial markets operate.
“Such an understanding gives our graduates a significant competitive edge over any other Business School’s finance graduates.”
Scary risk adviser recruitment ad
The job advertisement content being reproduced here comes from efinancialcareers. The client is described as one of the biggest asset management firms globally. It was looking for two risk managers, working across Investment Risk and Operational Risk.
Reporting to the Head of Risk (HoR), the role will be to work with the HoR and the risk team to provide an effective risk management system built around strong governance, policies, oversight and controls, it says.
The Risk team covers various aspects; Investment Risk, Operational Risk, Conduct Risk, Counterparty Credit Risk, Business Continuity, ICAAP etc. The role will focus primarily on Investment Risk and some Operational Risk.
- Review the current investment risk infrastructure which has been established to ensure compliance with AIFMD requirements, using experience gained in previous roles, consider if and how the arrangements could be enhanced and assist with the implementation of any such enhancements
- Provide scrutiny and challenge re the calculation of the various investment risk data which is produced
- Participate in the monthly investment risk meeting in which various outputs are discussed with senior individuals from across the business
- Assist in the completion of risk assessments across various business units and topics, documenting the output in the firm’s risk system, Risk Console, and ensuring the output is communicated and circulated appropriately
- Participate in the Quarterly Operational Risk meetings which determine the status of the key risks which the firm faces
- Undertake a dialogue with the owners of the key business risks and document the findings in Risk Console
- Assist in the oversight of the investment limit provisions coded in the Charles River Portfolio Management System
- Periodically review that actual investment risk in client portfolios is consistent with client expectations (determined through risk disclosures in prospectuses or sales presentation materials)
- Review and update risk policies and documentation such as the Risk Policy and the ICAAP
- Liaise with other AIS offices globally to help ensure consistency in the risk provisions and controls
- Provide advice and counsel throughout the business on risk
- Assist in the remediation of issues raised by Internal Audit, External Audit and any other similar bodies
- Actively participate and follow-up on appropriate actions agreed with the firm’s board, executive or other bodies
Other responsibilities include
- Undertake risk analysis on multiple funds and discuss this with the relevant fund managers, team members and management
- Responsible for developing good and appropriate risk measures
- Develop a good relationship with the product development team to help them launch and develop new products
- Be able to discuss risk management with investors and other relevant third parties
- Production oversight and the daily running of risk reports
- Production of risk committee packs and appropriate analysis
All in a typical day...