Hello all,
I am a less of a contributor on this site but think it makes sense to post my experience in the field of Market Risk and everything around it from a career point of view if it ends up helping few members. Happy to take questions, ask away...
I spent about eight years in this function working at a top risk solutions vendor company (Bloomberg/MSCI/BlackRock league). My role involved acting as a risk specialist for Hedge funds risk managers in UK, helping them with market risk measures, models, movements and best practices. This allowed me to learn their side of roles and other stuff.
The typical role involves model validation, risk modelling, risk reporting or stress testing (internal/regulatory), and risk monitoring.
Active funds keep churning their portfolios with new instruments and fresh techniques of mitigating risk like stress testing or what-if analysis which does not allow the monotonous factor to creep in.
A front like finance degree/certification like MBA finance, CFA or FRM would suffice once but now there is a growing quant element to this roles giving edge to candidates knowing sql, R, Python, etc.
Typical qualification is a post graduate finance degree like a FRM/CFA or a MBA in finance. Salaries range between $7oK for entry level and around $180-$300K for a VP position with a ~20% bonus. BB fund risk managers get as high as $300K average but again remuneration is the function of how sophisticated the firm is and type of role. Quant risk roles are paid in top bracket while reporting ones at lowest.
Work load is very reasonable about 10hrs at most levels and most roles (add little for juniors) but the only time it gets crazy is when the numbers are out of wack causing trading limit exception or a regulatory breach.
questions welcome!
Can you be more specific when you say "risk solutions vendor company"? So you acted sort of like a risk management consultant?
Were you solely located in the UK? do you know if Risk roles are similar in the US?
Thanks for sharing! Patrick
ps - feel free to connect with me on LinkedIn and WallStreetOasis.com>[email protected] if you want to become a Certified User on WSO.
My company has a risk solutions software which Clients subscribe to for measurement of risk. So that way we were vendors for them. I act as a specialist to help them make sense of the numbers and draw best practices in terms of what they should look out for depending on the asset mix of their portfolios. I was allocated to UK client base but got to know about US funds from my fellow colleagues as we often back-up for each other.
Both US and UK have similar roles but I know for a fact that it gets much more sophisticated in US which is a factor of how sophisticated investors are. So for example when you will find UK managers undergoing conventional VaR models, a US fund may be interested to explore GARCH model, or a t distribution etc. Instruments also get more complex in US with structured products (TBAs, MBAs, PTs) and exotics comprising a material portion of their portfolios.
Hey anky, thanks for doing this.
I am not entirely sure if you can go deeper and tell us about the risk metrics and models that you have used in managing HF risk but I would really appreciate it if you could.
There has been lots of discussions around decomposing HF returns/risk and factor risk. Do you think this is something that genuinely adds value from both risk management point of view and then maybe investment management? Majority risk solution vendors do claim that it is perfectly doable, but when you get to practicalities they start bringing up excuses like "oh, we all know that these FI arb strategies cannot really be breaken down into factors, let's look at Equity L/S funds instead".
Even if you could decompose HF returns and risk into understandable factors, how would you go about managing your HF risks? Do you come up with some sort of hedge overlay?
Not sure if you have participated in Investment Committee meetings, but as a risk manager how do you add value here? Do you think doing some sort of asset allocation for only Hedge Funds makes any sense or not?
Andrew Ang has done a great research in factor investing and apparently this topic is developing further. What is your take here?
@ Bondholm, I am a Chartered Accountant and a CFA. Most risk systems do allow decomposition on both standard and custom parameters. Standard is stuff like gic sector, asset class, currency, etc. Custom ones are based on what tags user puts in. So all FI arb positions will be tagged in a specific manner and this dimension is used for decomposition in reports. No fuss in that..and perfectly doable.
Once the breakdown is there RMs use them in variety of forms. Most obvious is picking casualties. E.g., emerging market bond denominated in foreign ccy are not doing great, so lets shave them off. In terms of hedging you may run a correlation metrics on these dimensions and good to go from there. Stress test is another useful add on on specific strategies.
A good add on I used to suggest my Clients is developing a simulator (as most solutions do not provide this and even if they do its not too customizable) wherein they iterate their portfolios using various combination of hedging instruments and playing around with weights to find which one is ideally suited based on last 6 mts performance for example. once you have a PL strip or a correlation metrics, doing this is not hard at all as you just keep re-scaling variables based on changing size. This can be done at portfolio level or any granular level below it. One can use a simple VBA code or a R or Python or any other computing programme to achieve this. Surely this is what-if exercise of a kind, but the idea is to use a sliced and diced output from a front like risk system adding a layer on top of it to achieve this. So that way risk systems can be leveraged.
There are solutions which focus on factor (multi-factor) modelling concept to compute risk and that goes down to stuff like market cap, style factor, and such other elements. So that's a modelling choice, but I guess what you are after is how smart/custom the output can get and take it further from there.
Taking specifically abt hedge funds their uniqueness is a highlight and that's where its difficult to standardize. So while they surely look for dimension based output, the end goal is discretionary to each RM/PM.
hope it helps..
Well I would say VaR methodology, Stress testing concept, statistics (correl, covar, beta, etc), pricing model/payoff of some instruments. Also lot of interviews somehow make you replicate black scholes equation so watch out for that.
generally i start my interview by asking what are your strong asset classes and then grill into it. But get to know about asset allocation mix of the fund you are interviewing and see where they are skewed and prepare accordingly.
Liquidity is a sub-set of market risk. when liquidity gets impacted it eventually impacts market price thereby causing market risk. So liquidity answers one of the causes of market risk. Very few funds have a clear focus on liquidity so team size would be hardly anything.
Bulk of liquidity is also regulatory related.
Liquidity to market should not be difficult for quant guys.
Starts with analyzing daily exceptions on VaR, stress test etc and back your findings as to why it occurred (data/markets/holdings/, etc). Monthends and quarter ends are same just that some more reporting parameters would get added.
Got to cater to regulatory fillings which is more cyclical.
Contribute to input feeds to risk system like building portfolio files monitor batch process etc if you are still junior into the role.
Finally there would be projects and adhoc tasks like automation, dashboards, answering investor queries, etc.