[zz] Risk Management-- From an unprofessional perspective

1. What is Risk and What does risk mangement do

This is a widely debated topic by the risk management professionals. Some simply define risk as the uncertainty about the future, some narrow risk to uncertainty that will cause adverse effect for the future.

To me, the best definition is provided by an Italian economist whose name I can't remember, he classified risk as

"Known unknowns and unknown unknowns". That is to say, there are things we fully aware that we don't know, other than that, there are things we are do not aware we don't know. Personally I want to add, there are things we think we know or we pretend we know, but we do not fully understand the potential tail risk embeded. In the financial universe, the third one might have caused more damage than the sum of the first and second one.

In business that is deemed to be risky, like commercial banking, investment management, the known unknows is part of the cost of doing business. People utilize various methods to manage this risk, like setting aside reserves to cover expected loss in case of commercial banking and implement hedging strategy in case of investment. Of course, not all risk will be hedged, a common strategy applied by hedge fund is to hedge the risk they don't want to bear and leverage the risk they think will move in their favor.

The unknow unknows imposes a much bigger risk both at intistutional level and industrial level. This kind of risk can be explained afterwards but can barely be predicted beforehand. The recent financial crisis might be a good example. People blame the securitation industry for bring up the financial crisis and drag the world into recession. To me, this is like blaming the autos for auto accident. The crucial question to is in the scenario of ever rising real estate price and strong economical performance after the dot-come crisis, at that time, it seems more than reasonable to securitize the mortgage and re-distribute the risk. Nobody really have a clue what is inherent risk behind the booming sector. Welll, some people do have some clue, John Paulson's bet against mortage made him billions of dollars. By the way, his gold focused fund lost 40% in 2011 while the price of gold hike all the way up. I used to ask a fund manager who was appointed CIO in March 2008 if financial crisis come again, his answer is "Unless it is gold not human that runs the financial market". This kind of risk stems from the greediness of people and mis-aligned incentives.

The third occasion that we pretend what we know is responsible for most trading loss and operational loss. When people think they out smart the market and bet on this false sense of security, if they are wrong, things blow up. Plenty of examples can be found.

The task of risk management is to find the most cost effecitve way to manage the known unknowns, try to analyze and fully understand the risk in the things we think/pretend to know and with the help of luck, find the unknown unkowns.

2. Can we say risk managemet is "science"?

I would hesitate to call risk management a "science" although CUHK does. It is true that risk management is a highly quantitative field and it requires deep understanding of the capital market and financial instrument to spot and model the risk, but financial market is driven by numberous behavioral factor that even the most sophisicated model can't capture due to the idealized assumptions. This problem is exacerbated in the risk management field because fear, irretionality and herding behavior accounts for a much bigger portion of financial market behavior when the risk comes. A famous financial analyst once said "Today's financial industry is so complicated that no single person could fully understand and predict", this financial analyst is John Moody, the founder of Moody's and he said it around 1920. Models and metrics gives people a base for discussion or a minimun requirement, but more often, it comes down to experience and common sense. A famous US risk mind use to say it is only when you combine the state of art modeling skill and judgement call that risk management will have its power.

So I would say, risk management is more an art than science.

3. Career In risk Management with an emphasis on the buy-side.

Risk management is a relative new and booming setor in the financial world.

In the old times, the sell side put risk management in the complicane or treasury department which is more about crunch data and reporting where the bank is standing. Most buy side company does not really have a risk management function. Now, the sell side is moving active risk management in individual business lines. Trading desk now has professional risk analyst. IBD also has risk management unit. Since I did not work in the sell side, I will focus on the risk management career in the buy side.

As investors become more and more educated and aware of the risk in invesment, they felt more comfortable if the investment management company does have a risk management department and the investment management company can also cope with adverse situation if there is a professional risk management team.

Comman Chian: Modeler > Portfolio Risk Manager > Single Security Analyst >data Intergrity and seperately enterprise risk.

Modeler: A lot of PhDs here. They develop models trying to measure the risk and forecast potential loss. This is a highly quantitative field. Most of the people have many years of experience in trading or structuring the product they cover. Except modeling at product level, they also model at portfolio level, trying to use quantitative models to express the degree of risk. Too many PhDs here... Hard to survive, very kengdie.

Portfolio Risk Manager: Portfolio risk manager work closely with trading desk, understanding their investment strategy and analyzing the inherent risk. Most likely, modelers are also Portfolio risk managers focusing on some special strategy. This job will have chance to learn the investment strategy and will likely to move up to portfolio manager or strategies.

Single Security Analyst: As the name suggest, this job focus more on the single security risk. It is the model implementer. Calculate the risk of each inividual security's risk using the models specified and validated by the modeler. This job will have chance to learn about the risk return profile of different financial product, most of them end up as traders.

Data integrity: This group is responsible to check the integrity of data and is more like the data management group. Everyday they get the pricing data and set up security information and double check this data. It has a lot of responsibility but no upside. If you screw up, it cost the company money, if you do your job perfectly, there is no value added. Be careful  to take a job like this.

lz帖一下原文link吧

这些信息很宝贵！现在国内风控基本等于没有，也了解不到风控的有关信息..