Most people have a love hate relationship with risk. We love the thrill of the stock market rising but hate losing money. Today, everyone seems fascinated with bitcoin’s meteoric rise but most people are terrified by the immeasurable risk. If you don’t want to gamble your money away, taking calculated risk is essential. The trick is getting that calculation right so you aren’t fooling yourself about the level of risk.
Do you have a love hate relationship with your risk process? Maybe you love the risk reports but hate the data management headache? Do you love the promise of analytical models but hate the tedious work configuring and maintaining them each time the portfolio changes? We often hear people grumble about the problems they have with their risk process and more often than not, the risk vendor takes the majority of the blame. Is this really fair? More importantly, is it productive if your true goal is to gain a better understanding of the risks in your portfolio?
For those of you wishing for a better risk system this year, we have a few suggestions:
- Are the problems you are having within your control?
Models with analytical problems only the vendor can fix are beyond your control, but more often than not, you have the ability to reconfigure the model for a better result. Is the model really the problem or is it just too difficult to make changes to the configuration? One of these is much easier to solve than the other. - Have you lost so much confidence in your risk reports that the baby is being thrown out with the bath water?
Annoying model behavior in one or more securities can throw-off the risk of an entire portfolio. If you can’t fix the model behavior, be sure to isolate it so it does not distract from other reliable information in a report. Being transparent about model deficiencies is important but you also need to mitigate risk model deficiencies before you lose confidence in the entire process. - Are your reports running too slow?
Maybe your database process that builds reports from the risk output is the problem, or maybe you are submitting overly complex queries to the risk engine. For complex portfolios, optimization is essential for performance. This is usually an afterthought during implementation but it may be very important once you are in production. Start by measuring each segment of the report process to isolate the choke points. Advances in today’s in-memory database solutions provide a powerful and fast analysis and reporting method. - Are you overloaded with risk information?
Getting reliable risk information is only half the battle. A good risk engine can overwhelm you with information and you need to filter it to make sense of it. Monitoring risk information to determine what is important to look at first is essential when everyone’s bandwidth is short. Risk reports are competing with other headlines, make sure yours is telling a story worth the audience’s attention or you will lose them. - If your audience has lost interest in risk reporting during this golden age of low volatility it may be time to remind everyone about the calm before the storm before they start discarding risk information as irrelevant. Put some perspective in your reporting by finding other periods where low volatility appeared permanent right up until the last minute and remind people that “This time is different” has never been true.
Fortunately, Red Swan Risk has perfected the tools, consultancy, and best practices that prepare our clients for the unknown.
Contact Red Swan Risk today for a demonstration of our efficient solutions for these challenges and more.
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