The chorus of pundits critical of VaR, traditional risk models, and Modern Portfolio Theory has grown louder over the years with a crescendo in the past few months with the public defeats of these theories in failing to defend firms against over-exposure in RMBS, CMBS, CDS and numerous other shaky acronyms. Although I agree that stat-based risk management has its flaws, it is not useless, and should be used in concert with a more fundamental approach to risk and portfolio management. Joe Nocera of the New York Times does a good job of describing the frailty of VaR, its overuse as the defacto risk management standard, and how smart firms use it as one of the myriad tools in their toolkit.
New York Times Risk Management Article
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all
About Cameron Hight
Cameron Hight, CFA, is an investment industry veteran with experience from both buy and sell-side firms, including CIBC, DLJ, Lehman Brothers and Afton Capital. He is currently the Founder and President of Alpha Theory™, a Portfolio Management Platform designed to give fundamental money managers the ability to create their own repeatable discipline to organize the complex process of portfolio management.
Traditional Risk Management – Where does it fit in the future of Portfolio Management?
The chorus of pundits critical of VaR, traditional risk models, and Modern Portfolio Theory has grown louder over the years with a crescendo in the past few months with the public defeats of these theories in failing to defend firms against over-exposure in RMBS, CMBS, CDS and numerous other shaky acronyms. Although I agree that stat-based risk management has its flaws, it is not useless, and should be used in concert with a more fundamental approach to risk and portfolio management. Joe Nocera of the New York Times does a good job of describing the frailty of VaR, its overuse as the defacto risk management standard, and how smart firms use it as one of the myriad tools in their toolkit.
New York Times Risk Management Article
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all
About Cameron Hight
Cameron Hight, CFA, is an investment industry veteran with experience from both buy and sell-side firms, including CIBC, DLJ, Lehman Brothers and Afton Capital. He is currently the Founder and President of Alpha Theory™, a Portfolio Management Platform designed to give fundamental money managers the ability to create their own repeatable discipline to organize the complex process of portfolio management.