Risk management the pros and cons of building your own system finalternatives some ways to make money

By aleksey matiychenko and alexander makeyenkov — risk management is in vogue these days. The crisis of 2007-2008 has in many ways been blamed on the failure what are some ways to make money of risk managers to predict the stress that we have what are some ways to make money all now lived through. With global markets rebounding and hedge funds posting positive results, the discussions about improving risk management policies and systems are what are some ways to make money taking place at many hedge funds.

Hedge fund technology & trading (PDF)effective risk management requires that the firms establish culture, policies and procedures that are specific to their operating model. However, at its core risk management is a quantitative discipline that what are some ways to make money requires significant investment in data, systems and people. In this article we discuss what it takes to develop what are some ways to make money internal risk management architecture.

It’s been a long term practice in the financial services what are some ways to make money to use microsoft excel as a tool for both storing what are some ways to make money data and performing analysis. The growing complexity of financial products and the need to what are some ways to make money have robust systems make excel spreadsheets a less than ideal what are some ways to make money environment to store data. To be truly reliable, the data used in risk management analysis should be housed what are some ways to make money in a relational database such as a MS SQL server what are some ways to make money or oracle.

Whenever new systems need to be put in place, the usual question of build versus buy arises. There may be many factors that affect the ultimate decision what are some ways to make money to build or buy a system. Though price is often an important criterion, it should not be the deciding factor. There are many instances when a hedge fund should opt what are some ways to make money for a buy decision and avoid spending time and resources what are some ways to make money on internal development. The buy decision is usually justified when implementing systems that what are some ways to make money aren’t specific or critical to the hedge fund’s core strategy. Such systems usually include: contact management, accounting, trade capture and others.

The decision to buy or build a risk management system what are some ways to make money depends on the complexity of the hedge fund’s strategy and the variety of products traded. Most commercially available systems may be sufficient to analyze a what are some ways to make money certain range of products. Few systems are able to produce meaningful analysis of a what are some ways to make money diversified and complex portfolio. Even fewer do it well.

If anything can be learned from the current crisis it what are some ways to make money is that risk management needs to be part of a what are some ways to make money core strategy of any investment firm. What this means is that risk management systems need to what are some ways to make money be part of the core strength of any hedge fund what are some ways to make money that wants to stand out. For such hedge funds, buying an off-the-shelf product may be a first step in developing risk what are some ways to make money management architecture, but it shouldn’t be the only step.

Ultimately, all commercial packages are made to be able to satisfy what are some ways to make money the largest number of customers. Some packages can be customized to each client’s needs, but the customization effort may be complex, limited in scope and expensive. We have seen such implementation at a number of hedge what are some ways to make money funds. The usual architecture involves a vendor risk management package such what are some ways to make money as risk metrics, measurerisk or others. Any risk management system (vendor or in-house) needs to be integrated with trade capture, portfolio management, and back office systems.

Depending on the complexity of the fund’s portfolio, the vendor system may not be capable of handling certain what are some ways to make money instruments. In such situations, the solution may involve either building an internal system to what are some ways to make money handle these instruments or purchasing an additional vendor system(s). We, in fact, have seen multi-strategy hedge funds purchase one system to handle equity products, a second system to handle fixed income, and a third system to handle exotic products. Ultimately, all these systems need to work together.

While ensuring seamless dataflow and building custom reporting that integrates what are some ways to make money all the systems is a big task in itself, there is an even a bigger issue. At the end of the day, a risk manager needs to have a complete picture of what are some ways to make money portfolio exposures. Such a picture needs to incorporate correlations among various products what are some ways to make money that exist in disparate systems. Building a tool to bring all these exposures together is what are some ways to make money akin to developing a complete risk system from scratch.

Developing a risk management system is not a trivial process what are some ways to make money and is likely to take significant time and money. Human resources required to implement such a project typically require what are some ways to make money at least two, and likely more, highly-skilled professionals with graduate or post-graduate degrees and extensive software skills. Even in the stressed employment markets that we are experiencing what are some ways to make money right now, such individuals carry an expensive price tag. Hiring several such individuals may not justify the value added what are some ways to make money by the development. Additionally, a proper enterprise-level development effort will require investment into project management, quality assurance and maintenance practices, all of which will call for extra hires. The solution to this may lie in outsourcing a significant what are some ways to make money part of such development to a firm specializing in such what are some ways to make money projects.

The in-house vs. Outsource decision does not need to (and perhaps shouldn’t) be mutually exclusive. In order to extract the full benefit from the custom what are some ways to make money developed system, the fund should employ at least one of those highly-skilled risk professionals capable of modifying and maintaining the system. Having an outside vendor perform most of the development would what are some ways to make money ensure faster implementation.

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