GAIM Monaco 2012: Hedge funds must re-evaluate use of VaR

InvestorsOperational Risk
20 Jun, 2012

Hedge funds should increase the number of risk measures they use to complement Value at Risk (VaR) in light of the J.P. Morgan debacle, a senior portfolio manager has urged delegates at GAIM Monaco 2012.

“Managers cannot just rely on VaR particularly with the events which unfolded at J.P. Morgan. We have however seen a lot of managers make serious improvements in the type and number of risk measures they use. It is something managers have been working on,” said Michael Browne, portfolio manager for Europe at Martin Currie, the $8 billion Edinburgh-based hedge fund.

VaR has faced renewed pressure after J.P. Morgan incurred an estimated $2 billion in losses at its Chief Investment Office (CIO) following serious mismanagement of a portfolio linked to the creditworthiness of bonds.

Anne-Sophie d’Andlau, deputy CEO and managing partner at CIAM, a Paris-based merger arbitrage fund acknowledged risk management at hedge funds had evolved over the last few years. She highlighted managers had been incredibly dependent on VaR but had increasingly adopted a more “discreet, case by case approached to risk management such as scenario analysis and stress testing.”

The abundance of alternative risk models available to hedge funds was a point made by Seth Birnbaum, a portfolio strategist at Bridgewater Associates. “There are a lot of risk products out there and we will see hedge funds evolve in how they measure risk,” he said.

VaR is not without its critics. Many reckoned VaR should have been made redundant following its inability to navigate the crisis effectively.  A COOConnect poll in May 2012 revealed 17% of respondents believed the model was firmly dead while 33% went further and said it “should have been killed after 2008.” However, 42% still reckon it is a valid tool.

Panellists added VaR was an effective tool when markets were stable – given the widespread market dislocation and ongoing fears about the eurozone, it is advisable other risk tools be used as well.