Improving the Investment Process through Risk Management by Bluford H. Putnam, D. Sykes Wilford, M. Barton Waring,

By Bluford H. Putnam, D. Sykes Wilford, M. Barton Waring, Timothy J. Rudderow, Leslie Rahl, Ronald J. Ryan, Leo J. de Bever, Jeffrey A. Rosenberg, Damian Handzy, Peter S. Jarvis

More and more, institutional traders call for an funding technique that's tempered via a willing possibility know-how and supported by way of probability administration practices which are built-in during the funding association. because the call for for possibility administration has elevated, so has the sophistication of the instruments on hand to consumers and funding managers, bringing either advances and issues. In addressing the hot demanding situations of threat administration, the authors during this lawsuits delve into an array of topics-the use of hazard administration for pension money and substitute investments, Monte Carlo simulation, hazard budgeting, and extra. lawsuits of the AIMR seminar "Risk administration 2003: qc of the funding approach"

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The types of instruments used will drive the level of risk management required. On one end of the spectrum are the highly liquid instruments with transparent pricing. On the other end of the spectrum are the illiquid, or less liquid, instruments that have to be priced based on a computer model, have optionality, or have uncertain cash flows. Mortgage-backed securities (MBS), for instance, have a lot of optionality and uncertain cash flows. Also, a manager who uses significant leverage or has large, concentrated positions requires a higher level of risk management.

The job of a fund-of-funds manager is to pick the ones that will outperform in their particular asset class. I would probably use more than one sector index to judge performance because big differences exist between assetweighted indexes, such as the Credit Suisse First Boston Tremont Index, and equally-weighted indexes, such as the HFR (Hedge Fund Research) Index. Question: How do you create long option positions without incurring normal cost? Rudderow: When you say normal cost, I assume you mean time decay.

We were slightly ahead of the curve on the recovery theme (which we are still in), and we still owned a lot of junk bonds, or maybe I should call them highyield bonds. Then, WorldCom had the poor manners to slip through the high-yield index like a bad meal, dropping from investment grade to high yield to bankrupt. We had put on a total-return swap in the high-yield market and assumed that we had isolated company risk and only faced generic risk. Unfortunately, WorldCom became the index for about two weeks.

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