Since the financial crisis that began in 2007, increased volatility has become the new normal when it comes to managing portfolios. Somewhat surprisingly, the leaders in taking risk have not always put a priority on risk management, placing much of the responsibility with brokers. However, that position seems to be changing, according to a recent Forbes article. Instead of relying on Excel models, hedge funds are demanding new tools that speed up decision-making support within their organizations.
The need for such tools is being driven partially by increased volatility in asset prices. While in the past it may have been acceptable for an analyst to take several hours to turn around findings on an asset’s price trend, today intraday volatility means decisions need to be made without long delays. In order to accomplish this, new expertise and technology is being sought by leading hedge funds.
Complex Securities Demand More Elaborate Risk Analysis
Another area where many hedge fund risk models break down is dealing with non-traditional equity securities. Even for equity focused funds, the increased use of swaps and futures contracts to gain exposure to equity demand increased modeling capability and specific expertise. Correlations need to be constantly monitored on an intraday basis.
Outside of equity funds, those focused on debt securities have even more critical risk management needs. Long-short bond positions and structured finance transactions all require complex modeling that stresses many firms’ existing risk management tools.
Clients Want to Understand Funds’ Risk Practices
Increasingly, institutional investors such as pension funds and insurance companies are becoming leading investment inflow sources for hedge funds. As these typically risk-adverse investors enter the hedge fund industry, more attention is being paid to risk management practices during sales pitches. Not only do clients want upfront knowledge of how risk management is being handled within the hedge fund, but they also want ongoing reporting on various risk exposures. This new reporting obligation certainly hasn’t fit within the risk management frameworks of most funds, again, demanding new skill sets.
What Does this Mean for Job Seekers in the Hedge Fund Industry?
The increased attention that is being paid to risk management within the hedge fund industry will certainly be of interest to risk management professions looking for new opportunities. Such skill sets are somewhat unique, and leaders in the risk management field are generally in high demand across a number of industries. Since the hedge fund industry generally offers higher compensation potential than corporate positions, such opportunities will generally be quite attractive to potential applicants.
The other aspect of risk management that will be in high demand is those charged with implementing and maintaining risk technology. Development of custom software applications and complex financial models are inherent with expanded risk management operations. Individuals experienced with risk management software tools are also likely to be in high demand within the hedge fund industry.