TECHNICAL ANALYSIS TO MANAGE RISK AND MAINTAIN TOP QUARTILE PERFORMANCE

 

 

By Dwayne Strocen

Website:  https://www.genuinecta.com

To manage an effective risk management solution requires more than the calculation of VaR.  Ultimately a successful risk management program requires the execution of an effective hedge.  Technical analysis is a vital element of this strategy.

Recent market reversals brought about by the Sub-Prime mortgage melt down is clearly a significant market correcting event.  No matter if you work in the risk department of a large bank with many employees or a small fund of funds as co-manager, you share the same basic concerns regarding the management of your portfolio(s).

1.                  how to maintain top quartile performance;

2.                  how to protect assets in times of economic uncertainty;

3.                  how to expand business reputation to attract new client assets;

It remains common in the financial industry to hear experienced portfolio managers state their risk management program consists of timing the market using their superior asset picking skills.  When questioned a little further it becomes apparent that some confusion exists when it comes to hedging and the use of derivatives as a risk management tool.

Risk management analysis can certainly be an intensive process for institutions like banks or insurance companies who tend to have many diverse divisions each with differing mandates and ability to add to the profit center of the parent company.  However, not all companies are this complex.  While hedge funds and pension plans can have a large asset base, they tend to be straight forward in the determination of risk.

While Value-at-Risk commonly known as VaR goes back many years, it was not until 1994 when J.P. Morgan bank developed its RiskMetrics model that VaR became a staple for financial institutions to measure their risk exposure.  In its simplest terms, VaR measures the potential loss of a portfolio over a given time horizon, usually 1 day or 1 week, and determines the likelihood and magnitude of an adverse market movement.  Thus, if the VaR on an asset determines a loss of $10 million at a one-week, 95% confidence level, then there is a 5% chance the value of the portfolio will drop more than $10 million over any given week in the year.  The drawback of VaR is its inability to determine how much of a loss greater than $10 million will occur.  This does not reduce its effectiveness as a critical risk measurement tool.

A sound risk management strategy must be integrated with the derivatives trading department.  Now that the Portfolio Manager is aware of the risk he faces, he must implement some form of risk reducing strategy to reduce the likelihood of an unexpected market or economic event from reducing his portfolio value by $10 million or more.  3 options are available.

1. Do nothing -  This will not look favourable to investors when their investment suffers a loss.  Reputation suffers and a net draw down of assets will likely result;
2. Sell $10 million of the portfolio -  Cash is dead money.  Not good for returns in the event the market correcting event does not occur for several years.  Being overly cautious keeps a good Portfolio Manger from achieving top quartile status;
3. Hedge -  This is believed by all of the worlds largest and most sophisticated financial institutions to be the answer.

Let's examine how it's done.

Hedging is really very simple, and once you understand the concept, the mechanics will astound you in their simplicity.  Let's examine a $100 million equity portfolio that tracks the S&P 500 and a VaR calculation of $10 million.  An experienced CTA will recommend the Portfolio Manager sell short $10 million S&P 500 index futures on the Futures exchange.  Now if the portfolio losses $10 million the hedge will gain $10 million.  The net result is zero loss.

Some critics will argue the market correcting event may not happen for many years and the result of the loss from the hedge will adversely affect returns.  While true, there is an answer to this problem which is hotly debated.  After all, the whole purpose of implementing a hedge is because of the inability to accurately predict the timing of these significant market correcting events.  The answer is the use of technical analysis to assist in the placement of buy and sell orders for your hedge.

Technical analysis has the ability to remove emotional decisions from trading.  It also provides the trader with an unbiased view of recent events and trends as well as longer term  events and trends.  For example, a head and shoulders formation or a double top will indicate an important rally may be coming to an end with an imminent correction to follow.  While timing may be in dispute, there is no question a full hedge is warranted.  Reaching a major support level might warrant the unwinding of 30% of the hedge with the expectation of a pull back.  A rounding bottom formation should indicate the removal of the hedge in its entirety while awaiting the commencement of a major rally.

It is evident that significant market correcting events occur infrequently, in the neighbourhood of every 10 to 15 years.  Yet many minor corrections and pullbacks can seriously damage returns, fund performance and reputation.

If you have ever been confronted with upcoming quarterly earnings or a topping formation which has caused you to consider liquidation then you should have first considered a hedge used  in conjunction with the evidence from a well thought out analysis of technical indicators.  Together they are a powerful tool, but only for those who have the insight to consider asset protection as important as big returns.  I guarantee your competition understands and so does your clients who are becoming more sophisticated each year.  It's important that you do too.

Dwayne Strocen is President of Genuine Trading Solutions Ltd.  and an honoured member of Stanford's Who's Who.  He's a registered CTA and derivatives analyst.   He also manages the Genuine USA Index Managed Account Program, and provides risk management analysis and hedging solutions for assessing market risk on behalf of corporations and financial institutions.   View more information about Who We Are and the benefits of Hedging your risk.

TRANSPARENCY IN HEDGE FUND INVESTING IS CRITICAL FOR INVESTORS

   By Dwayne Strocen                                     

Website:  https://www.genuineCTA.com


Transparency In Hedge Fund Investing Is Critical For Investors

Due to some recent high profile fraud cases within the hedge fund industry, many investors are seeking greater transparency from their investment managers.  While many managers protect their proprietary trading programs, there is one sure fire way to address this issue.

Fund redemption's are nothing new.  Every recession or bear market sees investors redeeming their fund investments and moving to asset classes which provide a greater degree of safety.  For most, this is the Government Treasury Bill also called the T-Bill.

While reasons for redemption's are as varied as the investment selections themselves, it seems that individual investors are uncertain of their understanding of what their money has been invested in.  While mutual funds are marketed to the investor with a lower knowledge of investment products, the hedge fund has always been the investment choice for more knowledgeable investors or the "Accredited Investor".  But now it seems even this group is calling for the need of greater understanding from their investment managers.

The battle for returns which out perform the index has resulted in many Portfolio Managers refusing to disclose their trading program for fear others will duplicate their trading style.  It is said by many managers that it's this ability to observe unique characteristics in the market place that differentiates their funds performance from the typical returns generated by bottom quartile performing funds and fund managers.  Of course the unregulated hedge fund industry has perpetuated this myth by trusting the Accredited Investor with an above average knowledge of the market and his ability to select the correct investment for their portfolio.  It seems the Accredited Investors does not always posses greater knowledge than their more un-sophisticated mutual fund brethren. 

So that bears the question of how to obtain this transparency to the satisfaction of the investing public?  And the answer is the Managed Account.

Managed Accounts are simply individual accounts opened in the name of the investor.  These accounts are not pooled, yet they are identically structured and managed by the hedge fund Portfolio Manager in the same style as the pooled fund.  The critical difference is the investors ability to see every trading transaction performed in the account by the fund manager.

The popularity of the pooled investment structure is that investors do not have to deposit large sums of money to utilize the services of a professional Portfolio Manager.  Most successful professional Portfolio Managers do not accept accounts less than US$10 million dollars. 

The hedge fund and mutual fund gained popularity by allowing smaller sums of money to be pooled with other deposits from many other investors.  So while you can currently participate in a hedge fund investment for $100,000 and a mutual fund for $50., a managed account may require a minimum investment in excess of $1 million.  Not so good for everybody.

But lets suppose you can convince your hedge fund manager to accept your $100,000 what advantage do you gain.

1.    the investment account is actually in your name and not in the funds name;
2.    your account is segregated from all other trading accounts;
3.    instead of waiting for your monthly or quarterly statements, you can see the activity in your account on a daily basis in real time;
4.    cash deposits or withdrawals can be simplified;
5.    you have an overall increase of account transparency; and
6.    you can no longer claim you did not know what was going on in your account. (oops, is that a benefit?).

There are also some disadvantages.  Or put another way, the pooled investment structure provides some distinct advantages which originally made them popular since the first hedge fund was created in 1949.  These funds should not be confused with the investment account managed by your stock broker.  The professional Portfolio Manager will continue to exercise complete trading autonomy and does not want your advice on how to manage the assets in your account.

Advantages for remaining in a hedge fund or mutual fund:
1.    investors can obtain the services of a professional fund manager with smaller sums of money;
2.    management costs are cheaper since it is more economical to manage one large account instead of many smaller accounts;
3.    you pay one flat management fee, no commissions; and best of all
4.    you still have someone to blame if things go wrong.

It is estimated the hedge fund  industry managed $2.7 trillion dollars by the end of 2008.  The mutual fund industry manages $19 trillion investment dollars.  So there is no question of the popularity of the industry since that first fund in 1949.

If transparency is an issue for you, you need to take a long, hard look and evaluate the pros and cons wisely.  Take some time to speak with your fund manager about a managed account, it just might be the alternative you've been looking for.


Since 1999 Genuine Trading Solutions has been providing corporations and investment funds with derivatives strategy and comprehensive risk hedging solutions.  View more information about our managed account program and about reducing risk .

GENUINE TRADING SOLUTIONS LTD. REVIEWS DERIVATIVES AS A ROLE FOR PRICE PROTECTION AND RISK MITIGATION

Managing Risk and Hedging Solutions

February 26, 2018 - Genuine Trading Solutions Ltd. is a CTA firm with specific expertise in derivatives strategy and risk hedging. The company has been providing risk management hedging solutions and investment strategies to small and medium sized companies and financial institutions since 1999. Now Genuine Trading Solutions is announcing a turn key solution to both the identification and analytics for determining the risk threat but also the execution of the subsequent risk off-set, known as a hedge.

Do you need to understand derivatives to manage risk? The answer is no, because we understand derivatives and we understand risk, its all we do. We are experts in the use of derivatives and their use in hedging and using the various exchange traded and O-T-C products to provide price protection and a stable price environment.

Identifying your area of concern is the first step to putting a plan into motion. There is market risk, operational risk, currency risk, credit risk, weather risk, interest rate risk and even reputation risk. You may ask "Where Do I Start?" Dwayne Strocen President says "At the beginning, and include a team of specialists who understand both the analysis of risk and the hedging of risk."

An effective risk plan involves a two-step process. First is the analysis phase followed by the execution phase. The analysis phase consists of analyzing where your risk is coming from and it’s impact on your business. The execution phase is the formulation of an effective hedging program and its implementation with the use of derivatives. Then you’ll need to rebalance your hedge daily or weekly depending on your business activity.

Our team of professionals have been providing strategic risk management and hedging services since 1999 and can be one of your team of expert risk professionals providing derivative strategy and risk hedging.

Contact Information:

Dwayne Strocen – President

Toll Free: (888) 317-9077

Website: www.genuineCTA.com

e-mail: dstrocen@genuineCTA.com

THE PRACTICE OF RISK MANAGEMENT HAS LET ME DOWN. HAS IT LET YOU DOWN TOO?

By Dwayne Strocen
Website: https://www.genuinecta.com

I know you're wondering how the industry and practitioner's of risk management have let me down. I suppose I should begin by telling you that I've been in the industry for more than 15 years, but not as an analyst or modeller. My world is on the other side of risk management, namely risk execution known to professionals as hedging.


I have managed hedging portfolio's for both hedge funds and corporations. Now you'd think that risk management professionals would know what hedging is all about and how it is an integral component of all risk management programs. I'm going to assert that this assumption is flatly false.


If you work for a large corporation or financial institution such as a bank or insurance company you know that there is both a risk management department and a hedging department. Often these two departments are operated as separate and stand-alone entities. Often on different floors and at times in different buildings altogether. The hedging department is usually co-located with the trading department. My question is why?


Small and mid-size companies neither have a full time risk management department and usually no derivatives expertise.   A good deal of these part-time duties are assigned to a department called Treasury with oversight by the Chief Financial Officer who's usually an accountant. The Treasury department is a catch-all for everything not sufficiently large enough to have its own management oversight.


Why is risk management oversight headed by the chief accountant when in fact the COO, Chief Operating Officer is much better suited for this task. Risk management and hedging is more closely related to a company's operational requirements than it is to accounting and auditing. But I can't fault the executive committee for making this error. After all what do they know about risk management and its different components.


As a risk management and derivatives strategist, our firm usually receive a request from a clients executive team when they realize they have a risk to their foreign exchange exposure or to a rise in interest rates. The question often comes in the form of an assessment to this risk. As a risk consultant working worldwide but primarily in North America, we are often required to source local risk analysts and modellers whom we can imbed within the company to conduct a comprehensive risk assessment. We then compile the analysis and present it to the executive committee or Board of Directors. This will always include a recommendation for a solution to the mitigation (hedging) of their risk.


As any executive or military commander will tell you, never make an analysis or recommendation without including a solution to the problem.  In the field of risk management this ultimately includes the use of derivatives for a comprehensive hedging solution.


Now here is where my problem and criticism lay within the industry. After 15 years, when assessing an analyst candidates knowledge, I have learned to rely on the answer to one simple question. And ninety-nine out of a hundred times the conversation goes like this:


Me: "When you have completed a detailed analysis and present your findings, what is your recommendation comprised of?"

Analyst: "What do you mean?"

Me: "All proposals must include a recommendation for the implementation of a solution, a risk mitigation program. You can't simply submit your analysis without a solution. pause - can you?"

Analyst: "I really don't understand your question?"

Me: "What do you do after the completion of your analysis?"

Analyst: (confused look) "Well, more analysis."

Me: "Okay, let me re-word the question. o you ever recommend the use of hedging in the final presentation to your boss or client?"

Analyst: "What's hedging?"

Sigh, end of interview…


Over the years, I've heard all sorts of the excuses from risk analysts to justify their position:

• I'm just an analyst / modeller;

• I don't work in hedging;

• I'm not a trader;

• in my previous position I did not have to know that;

• isn't hedging part of the trading department;

• hedging isn't risk management;

I's akin to a Dentist saying "we only conduct examinations here, you'll have to find another dentist to pull your tooth."  A mechanic saying "We don't fix cars here, only assess the repairs you might need". A roofer saying "I only install new shingles, you'll have to get someone else to remove the old ones."


It sounds silly, but don't laugh. About as silly as a risk management professional saying "We only conduct analysis here, you'll have to find someone else to manage the risk execution program." Then insult the client and the profession even further by saying "I can't help but I'm sure you can find someone on the internet."


Is the client or employer receiving value when presented with an incomplete recommendation. They deserve to have every opportunity to make an informed decision with all the information available. In a time where companies are becoming more competitive, more complex, more things to their customer base in order to survive. It's time the risk management profession does the same. It's time to recognize and embrace risk management as a two step process.

-   Step one – The analysis phase;

-   Step two – The execution phase;


Now let me make a recommendation of my own. whether you're a consultant or a department head you can add value by including a derivatives specialist with expertise in hedging and risk management. But please don't look your client in the eye without the courtesy of a comprehensive proposal which includes the execution phase of risk management. Hedging.


Dwayne Strocen is President of Genuine Trading Solutions Ltd. a registered CTA firm and derivatives strategist specializing in analyzing and hedging market and operational risk using exchange traded and OTC derivatives.

MARKET RISK - NOT TO BE IGNORED OR OVERLOOKED

 

 By Dwayne Strocen

Website: https://www.genuinecta.com

Understanding Market Risk and the solutions available to mitigate or eliminate financial loss in today's global market.

First of a two part article

Fund managers, whether they be equity or bond traders, know all too well that returns are not simply a result of their asset selection prowess.  Many external factors come into play.  But what are the issues facing the professional money manager.  Management of risk is one of the most important, and not all fund managers analyze their market risk.  This is often explained as a lack of education and a failure to understand the mitigating solutions for off-setting risk.

Market risk is defined as "the unexpected financial loss following a market decline due to events out of your control."  Stock or bond market volatility or market reversals can be the result of global events happening in far flung corners of the globe.  Top analysts and fund managers simply do not have the resources to crystal ball gaze and predict those events.

Examples of several major unexpected events that sent shock waves throughout the financial community have been:

-          1982 Mexican Peso devaluation;

-          1987 stock market crash known as "Black Monday";

-          1989 USA Savings and Loan Crisis;

-          1998 Russian Ruble devaluation;

-          1998 $125 billion collapse of Hedge Fund Long Term Capital Management;

-          2006 collapse of Hedge Fund Amaranth with losses of $5.85 billion.

In 1994 Bank J.P. Morgan developed a risk metrics model known as Value-At-Risk or VaR.  While VaR is considered the industry standard of risk measurement, it has its drawbacks.  VaR can measure total dollar value of a funds risk exposure within a certain  level of confidence, usually 95 or 99 percent.  What it cannot do, is predict when a triggering event will occur or the magnitude of the subsequent fallout.  For some company's and funds, a steep decline or protracted recession can be devastating.  Even forcing some un-hedged firms into bankruptcy.  A triggering event can have a ripple effect forcing people out of work and economies into recession effectively putting more people out of work.  No person and no economy is immune.

If you're invested in a mutual fund, chances are your fund is un-hedged.  Until recently, mutual fund legislation prevented mutual funds from hedging.  Many jurisdictions have repealed this rule however mutual fund managers have been slow or decided to continue with "business as usual".  The reason is that most investors of mutual funds are unsophisticated and do not understand the hedging process and may re-deem their money from an investment strategy they do not understand.

Hedge funds on the other hand do not have these restraints.  Investors are more sophisticated and are more open to the nature of hedge fund strategies.  Some of which are not disclosed due to a fear of piracy by competing hedge fund managers.

Risk reduction solutions are not complicated but do require the services of a professional who understands the process.  This is the role of a Commodity Trading Advisor, also known as a  CTA.  While most CTA's are hedge fund portfolio managers, few specialize in risk management analytics.  The focus of a risk manager is on the analysis of solutions to reduce or eliminate market and / or operational risk.  No matter the role, all Commodity Trading Advisors are specialists in the derivatives market.

The first step is the value at risk calculation to determine a funds risk liability.  A risk mitigation strategy known as a hedge is then implemented.  After all, identification of one's risk is only beneficial if a solution to off-set that risk is put into place.  Hedging requires the use of derivatives, either exchange traded or over-the-counter.  These can take many forms.  The most commonly used hedging instruments are index futures, interest rate futures, foreign exchange, exchange traded commodities such as Crude Oil, options and SWAPS.

A more detailed explanation of derivatives and hedging will be discussed in our next article.  Now that we've identified an easy solution for your market risk worries, the implementation of the right strategy can be as easy as a call to a qualified and registered Commodity Trading Advisor.

Dwayne Strocen is a registered Commodity Trading Advisor specializing in analyzing and hedging Market and Operational Risk using exchange traded and OTC derivatives.  View more detailed information about Risk Management and Foreign Exchange trading.