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Understanding
Market Risk and the solutions available to mitigate or eliminate financial
loss.

The 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.

Commodity
Trading Advisor, Genuine Trading Solutions of Toronto, find not all fund
managers analyze their market risk.  The
company explains this is often due to a lack of education and a failure to
understand the mitigating solutions for off-setting risk.

Genuine
Trading Solutions President, Dwayne Strocen explains market risk as “the
unexpected financial loss following a market decline due to events out of your
control.?  He goes on to explain that
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 knows 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%.  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 own 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repealed this rule however mutual fund managers have been slow or decided to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 Commodity Trading Advisor firms such as Genuine Trading Solutions, also
known as a CTA.  President, Dwayne
Strocen states that while most CTA’s are hedge fund managers, few specialize in
risk management analytics.  Our focus 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.  They 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.  Website: http://www.genuinecta.com

About the author

Tags: bond traders, commodity trading advisor, lack of education, long term capital management, market decline, market risk, market volatility, peso devaluation, professional money manager, risk exposure, risk measurement, risk metrics, ruble devaluation, russian ruble, savings and loan crisis, shock waves, stock market crash, trading solutions, understanding market, value at risk

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