March 22, 2018 · Blog Posts
The One Investment That’s Never a Risk
We all know the market is full of volatile ups and downs, with bouts of violent waves, periods of eerie calm and the occasional unexpected swell that can catch even the most established firms by surprise. These shifts can occur with little to no warning, but that doesn’t mean risk managers can’t prepare for them. Like surfers invest in reliable surfboards to ensure they can ride any waves that come their way, trading firms need a sophisticated risk management tool that can help them weather market volatility. With the right resources, risk managers can conquer the most tumultuous surges, and come out on top when others go under.
The recent DOW swing and VIX spikes took many firms by surprise, and for those who didn’t hedge at the right time, the right way or the right amount; these shifts spelled disaster. Some funds lost 80% of their assets and are now entangled in legal battles with investors who felt their money wasn’t adequately protected. Several clearing houses also experienced alarming drops in segregated funds, with some plummeting more than a billion dollars. Adequate risk management would’ve helped the firms that suffered be better prepared to ride the recent volatility wave, and avoid the host of financial and legal issues they now face.
No risk manager wants to become a casualty of a volatile market – and none should. By investing in a proven risk management platform that can run a gamut of scenarios and provide information in real-time, risk managers can be fully equipped to protect their firm’s assets in almost any event. A platform with these capabilities may cost more than others, but the price is small compared to the damage one unexpected event can have on an unprepared firm.
The ability to analyze risk exposure across various market scenarios enables a risk manager to proactively create strategies for a wide range of circumstances, instead of reacting to events after they happen. Risk managers should have the power to easily shock underlying prices, volatility, correlations as well as run more standardized risk measures like VaR, to see how their trading groups or clients perform in each scenario – then make a plan. No matter what turn the market takes, a comprehensive approach to simulating risk helps create a surprise-proof strategy.
Enterprise risk management software can also offer real-time alerts, real-time reports, intraday margin and volume monitoring – and the ability to monitor the firm’s activity anywhere, anytime. When 15 minutes could be the difference between a loss or gain, staying afloat or shutting down, a progressive risk manager doesn’t have time to wait on a scheduled report. For a carefully crafted risk management strategy to be successful, it needs to be supported by critical real-time information and smart alerts.
A risk manager with the right tools can help firms avoid getting pounded on those unpredictable days, and even identify new swells to help their firm come out on top. Because when you’re the one in control, it can be an exhilarating ride.