Notes from the IPARM conference in Hong Kong, part 2

A day full of fascinating discussions at the Third Annual Investment Performance Analysis and Risk Management Asia 2010 (IPARM) conference at the Kowloon Shangri-La in Hong Kong, China. Hope you've been enjoying my live tweets from the conference.

Kicking the event off was Trevor Persaud, the Head of Investment Risk Oversight and Performance at Prudential Asset Management in Singapore. Trevor's topic was redefining the roles and responsibilities of performance analysts and risk managers to better support the investment management teams. Trevor started off his presentation by asking the audience whether the portfolio manager at their respective firms was the only person at the firm who can say exactly what is going on in a particular portfolio. While Trevor acknowledged that this was expected since the PM should have the expertise, he questioned whether this lack of challenge and oversight is healthy for the fund. From his experience, he has found that independent expertise of a fund helps moderate the action a PM might otherwise undertake.

Having worked in both Europe and Asia, the first question asked of Trevor by the audience was what were the big differences between the risk management function in the two regions? Trevor cautioned his response by saying this was not a sweeping statement, but he thought that in Asia, up until recently, the role was purely operational, very limited independence and oversight. However, of late, he has noticed that in Asia, there is a thicker layer of senior management (compared to Europe where the Portfolio Manager is king), and management has been more receptive to risk managers looking to take a more active role and becoming more than just serving a pure operational function. In Europe, Trevor thought that risk managers have taken on more responsibility than their Asian counterparts, but that a risk manager's ascension is capped, there comes a point (and I hope he was speaking from personal experience) when the risk manager is at peril of overstepping his or her bounds in the hierarchy of a European investment management firm.

Daniel Wallick, Principal in the Investment Strategy Group at Vanguard, gave an equally interesting talk and got everyone's attention when he equated risk management with the Allegory of the Cave from Plato's The Republic.

For those who haven't read the book since high school, Daniel's analogy was that risk is similar to man looking at the shadows on the wall in the cave; we are not really sure what we are looking at. Daniel's talk expanded into the two reasons why we need risk management (people are imperfect and crises happen) and ended with four interesting fundamentals that are followed at Vanguard:

1. Risk management is an integral part of the investment decision making process.
2. An enduring value-added investment program in good ties and (crucially) in bad.
3. Top-down qualitative judgment/rigor + discipline in quantitative measures.
4. No substitute for the judgment and experience of the risk management and investment teams.

Daniel's session ended with a question from the audience on his assessment of the current risk environment in the U.S. given his experience and focus there. Daniel replied that he was not specifically concerned near term with inflation (in the U.S.), but what concerned him was how exactly should the Fed back out of what it has been doing and how/when do they do that.

There were a couple of additional speakers today who covered topics that I will take up in a future blog post. As for tomorrow, we have an equally interesting set of speakers and topics coming up in day two of the conference, some that have caught my attention include:

• Dr. Stan Uryasev, Editor-in-Chief of The Journal of Risk, who will be seeking alternatives for VAR as risk measure.
• A panel discussion on finding the right risk model and measurement system that is appropriate for your investment decision process, particularly interesting since my colleague covered this topic in a blog post last month.
• Peter Urbani, CIO at Infiniti Capital who will be revisiting risk management and performance measurement for hedge funds.

Please check back early next week for a recap on these interesting topics.

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