Put Some Friction in Your Risk Model
Coverage of the 2010 Risk Management Conference.
BY Brooke Smith | August 25, 2010
When it comes to risk management, more isn’t necessarily better, said Ian Baker, vice-president, derivatives and risk management with Pyramis Global Advisors, at the 12th annual Risk Management Conference in Muskoka, Ont. “You want to actively look for differentiated models. You want a little bit of friction in those models,” he said, adding that his motto is All models are wrong; some are useful.
Risk managers, Baker said, aren’t as smart as they sometimes think they are. In fact, they learned some valuable lessons from the crisis:
• assume liquidity is not there when you need it;
• rebalancing only works with liquidity;
• keep leverage away from vital organs; and
• systemic risk is not diversifiable.
Going forward, managers need to focus on liquidity risk. They haven’t done a great job of it, said Baker, but they’re getting better. “They need to understand qualitatively and quantitatively the interactions among all component parts of a portfolio.”
Brooke Smith is managing editor of Benefits Canada. firstname.lastname@example.org