Institutional Investor's Alpha Magazine - May 2008 - (Page 61)

Alpha Bytes Risk Management VaR Enough? Value at Risk calculators are popular among hedge funds, but the recent market turmoil has shown their limitations. “You can’t rely on Value at Risk as your only metric.” Leslie Rahl, president, Capital Markets Risk Advisors. New York City, April 29, 2008. W hen an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. The people in control at UBS certainly did. In April, after taking $37 billion in subprime-related write-downs and shutting down its Dillon Read Capital Management hedge fund division, the big Swiss bank released a soul-searching postmortem. UBS concluded that one of the problems was that its risk management systems faltered and a key reason was an overreliance on a model called Value at Risk, which contributed to lowball assumptions of exposure. UBS isn’t the only one looking warily at VaR. The venerable risk-modeling tool, widely used in the investment world, has come under increasing criticism lately, derided as a fancy placebo sold to suckers by risk systems vendors. In an op-ed commentary in the Wall Street Journal in April, Lazard chairman and CEO Bruce WasserPhoto by Rayon Richards for Alpha stein pronounced VaR a “dud.” David Einhorn, president of Greenlight Capital, a New York–based hedge fund ﬁrm with $6 billion under management, followed up the same month with a speech in which he declared that VaR had provided absolutely no help in protecting assets during the recent market mayhem. But risk analysts and managers say VaR is being unduly singled out as a cause of the recent troubles, when the problem is its misuse. Although just about every risk system on the market contains a VaR calculator, it is just one of a number of tools typically packed into a risk management software suite. The trick is knowing when and how to use VaR and understanding its limitations. “You can’t rely on VaR as your only metric,” says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. “We recommend people use three to ﬁve different metrics. It’s like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things.” A veteran of 35 years in the ﬁnancial industry and a MAY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 61 By Irwin Speizer

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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