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

BULL MARKET FOR RISK MANAGERS n 2006, when Craig Termotto joined Michael Page International, the Londonbased worldwide financial ser vices recruiting ﬁ rm, he was half of a two-person team based in Stamford, Connecticut, that specialized in financial risk management. Today, as head of ﬁnancial risk recruiting for that ofﬁce, he heads an eight-member squad that scrambles to keep up with burgeoning demand. And that’s just in Connecticut. The firm also has seven risk recruiters in New York City and ﬁ ve in Boston. “Recruitment has probably tripled or quadrupled” in the past two years, says Termotto, 37, a former institutional equity trader for several brokerage firms, including UBS and ING. “Last year was a record year for us,” notes Michael Woodrow, president of executive search ﬁrm Risk Talent Associates in New York. “It is a good time for risk managers.” Once regarded as a sideline job in the highoctane world of trading and portfolio management, risk management has emerged as a high-paying, sought-after specialty at hedge funds, banks and other ﬁnancial ﬁrms. Hiring is on the rise, pay is up, and ﬁnancial risk management training programs are booming. Hedge funds, which increasingly want to land institutional investors, are ﬁ nding that endowments and pension funds demand high I levels of risk management — a trend accelerated by the recent market turbulence. The push for more-sophisticated risk management has resulted in a ﬂ ood of business for recruiters. “A lot of it has come down to what outside investors want to see,” Termotto says. The Global Association of Risk Professionals, founded in 1996, counts 76,000 members worldwide. When it started issuing a ﬁnancial risk manager certiﬁcate in 1997, 108 candidates sat for the exam. Last year 6,740 took it. As of May, the number of registrants for the 2008 test, which will be held in November, was already at 9,020. “I think the current financial market is helping us,” says Chris Donohue, head of GARP’s Research Center. “It has put risk management in the headlines. More people are looking for training and education.” One of the attractions of the profession is the rising level of compensation. In its annual survey of pay for risk professionals in the capital markets, released in April, Risk Talent Associates found that average compensation increased 7 percent in 2007 over 2006. The key driver: cash bonuses, which were up 11 percent last year. Alpha magazine conducts its own compensation survey for the hedge fund industry, and the ﬁgures for 2007 found that mean total com- pensation for chief risk ofﬁcers at hedge funds was $1.59 million in 2007, up from $1.40 million in 2006. That was the highest pay level for noninvestment professionals at hedge funds and on par with what senior traders made. Lowerlevel risk managers earned an average of $760,000 in 2007, up from $575,000 in 2006. Those salary levels would have been unimaginable 15 to 20 years ago. Financial risk managers in those early days were considered low-level functionaries who couldn’t cut it in the fast-paced world of trading, and their pay reﬂected their status. “The original risk manager 20 years ago was a guy in a short-sleeve shirt who bought insurance,” says Risk Talent’s Woodrow. “It certainly has matured over the years.” Nowadays it is not unusual for a chief risk officer to have a Ph.D. in finance. Philippe Jorion, a finance professor at the University of California, Irvine, says that students in his advanced ﬁnancial engineering course increasingly are interested in becoming risk managers. “The area has blossomed over the past ﬁ ve to ten years,” he adds. Termotto says ﬁ rms recruiting risk mangers now frequently seek candidates with advanced degrees from top-notch universities, and they give preference to those with strong backgrounds in math who can run today’s complex risk analysis programs. “In the old days you took a trader who didn’t want to trade anymore and put him in risk, even if he really didn’t understand risk,” he says. “Today, risk people sometimes rank higher than traders.” — I.S. C ampbell Harvey, a professor of international business at Duke University, places the blame for the recent problems on practitioners. He says that university researchers have been steadily improving risk modeling and measuring methods to deal with tail events, creating models that can provide a better assessment of liquidity and leverage, but that financial firms have been slow to adopt them. “In the practice of risk, there is not that much that has changed over the past ten years,” says Harvey, who points to Long-Term Capital Management, the hedge fund that famously collapsed in 1998. He notes that many of the ﬁ rms that got caught out this time not only employed concentrated leverage like LTCM did but also had similar risk modeling and management methods. According to Harvey, one of the key problems today is that too many decisions are based on analysis using normal return distributions. The practice of calculating the standard deviation of bell-shaped curves using historical returns doesn’t take into account the remote chance that a big, disruptive and unexpected event might occur and skew results. “The standard deviation approach doesn’t really capture the tail,” Harvey explains. “What you need to capture is the forward-looking skew.” Figuring out how to measure the likelihood and impact of future tail events has been a preoccupation of Harvey’s for decades. He published his ﬁrst paper on analyzing and measuring the skewness factor back in 1976 and reﬁned it in another paper in 2000. Other academics have offered theories and proposed methods for incorporating possible future tail events in risk analysis as well as better ways of predicting the potential impact of leverage and liquidity on a portfolio. The lapses in risk practices were evident in a 2006 survey conducted by accounting ﬁrm Deloitte & Touche that polled 60 managers who ran 244 hedge funds. Most were in the U.S. and about a quarter had assets of $1 billion or more. Because the survey was taken two years ago, it offers SEPTEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 61

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

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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