Financial news

Risk management is still an art as well as a science. We have seen the use of sophisticated models based upon correlation between different risks and assets. Many of the parameters are numerical and objective. These provide real benefits when applied properly. We also have to realise that these tools only handle certain types of risks adequately, mainly market and credit risk. When new products are introduced and increasing complex financial modelling overawes us, we deem it fit to call in the investment risk experts.
If computers and automatic limit systems worked all the time, then no one would have to go outside for specialist help, except for the occasional risk management and dealing system supplier. Mechanical-type systems only account for a small part of the entire risk management business process. Many companies do not possess all these skills in-house and there are reasons why they must hire outsiders.
This means that in major change projects, some element of accountability and control are reduced because of taking in outside help. Also, cost-effectiveness is not the top criterion in these projects at all. In essence, it is ironic that we hardly place checks and controls over those who are hired to control our errant staff.21
More products and mathematical modelling techniques are brought on the market every year. This creates a buoyant market in certain dealing areas. The prospects for derivatives and futures contracts are bright in many ways, but what do they offer fund managers in the way of real value? Many are confused as to the exact answer, so they bring in outside derivatives experts to help them. Some of the problems lie in the complexity of these financial instruments, the extreme leverage they can possess and the manner in which people have been mis-selling them. The deep mathematical foundations underpinning derivatives and financial futures instruments mean that more scientific knowledge is needed to understand them. Thus, a breed of mathematicians and intellectuals sometimes known as “rocket scientists” or “quants” appeared in various brokerages, banks and funds. Investment risk is not a question of solving solely by mathematical or scientific means. Nevertheless, the use of mathematics in investment theory seems to be addictive for many.
So, we have to identify the risk style of the professional investment manager. Then, we have to pick the type of fund that our risk appetite allows. It seems that many investment meals do not match the risk appetite appropriately. Another critical look at the menu can rebalance the investment fare.