This content is from: Portfolio
Five Questions: D. E. Shaw’s Peter Bernard
Investment firm’s chief risk officer says his job is more complex than ever before.
3. Is Value at Risk still useful in this brave new world of risk management? Although some people unreasonably relied on Value at Risk in the past and were burned by it, we believe that Value at Risk is still a very good tool when used for specific purposes. For example, Value at Risk remains a reasonable way to compare risk across asset classes and strategies. What Value at Risk doesnt do is give you an accurate prediction for the worst-case scenario. The industry has now embraced stress testing, which is more nuanced than Value at Risk, but stress tests shouldnt be considered the last word in risk analytics either.
4. Five years ago you were doing the kind of stress testing that even some big banks werent doing. Why have most firms followed your lead? Weve used stress tests for many years because they can provide a foundation for asking more-informed questions about a portfolio: Why did those two strategies both react similarly to a stress tests change in currency values? or Why did that position react so anomalously to a shift in commodity prices? Stress tests can reveal unexpected correlations that might occur in difficult circumstances.
5. What changes have you seen in risk management since the financial crisis? The biggest change has been improvements in the way the industry communicates with investors. They asked for more information about risk exposures, and the industry responded thoughtfully and intelligently. Its not just about the quantity of information but also the quality, relevance and understandability of that information. Although weve always provided extensive risk-exposure information to investors, after 2008 we undertook a major effort to improve what we communicated and how.