Market turmoil in August and September led some institutional investors to re-evaluate and update their risk management practices, especially value at risk.
Value at risk might have been getting too much emphasis at the expense of stress testing and other risk practices, said Leslie Rahl, principal for Capital Market Risk Advisors Inc., New York, which conducted a survey on risk management practices.
Executives at some institutions are taking steps to reduce their reliance on value at risk, Ms. Rahl said: "No one measure is enough in the kind of world we're living in."
But in interviews with Pensions & Investments, executives at GE Investments, Ontario Teachers' Pension Plan Board, World Bank, New York City Retirement Systems and Commonfund Group said they generally were satisfied with how VAR and their risk management practices held up during the volatility.
"Our risk management practices held up very well," said Steven Fierstein, senior financial analyst with GE, Stamford, Conn.
While the market did cause GE executives to "question what some of the (value at risk) numbers mean," Mr. Fierstein said GE executives believe VAR is still "a valuable tool."
For GE, value at risk is just one part of a risk management process that begins with asset allocation and ends with checks including performance attribution and risk measurement, he said. GE Investments oversees $59 billion in General Electric Co. retirement assets.
Leo de Bever, vice president in research and economics with Ontario Teachers, North York, said Ontario's use of VAR is less susceptible to changes in market behavior because the U.S. $41 billion fund calculates value at risk for 13 years, a longer period than is typically used.
So the value at risk calculations are performed with more history, and more of the sharp market moves that can increase VAR values, he said.
Nevertheless, Ontario does scenario analyses as well, he said.
The World Bank calculates value at risk and does scenario analysis and stress testing, and didn't run into any surprises, said Afsaneh Mashayekhi Beschloss, pension director for the $8.6 billion pension fund.
Likewise, New York City's risk reporting is based on monthly and quarterly data, and the swift market swings haven't led officials there to call for any changes to its program, said Harris M. Lirtzman, director, risk oversight in the city's bureau of asset management, which oversees the $52 billion New York City Retirement System.
At the $20 billion Commonfund, Westport, Conn., investment transparency was the leading risk management issue during the market upheaval.
As an investor with 16 different hedge fund or absolute return managers managing about $750 million, gaining better information on what they were doing was an issue, said Todd E. Petzel, executive vice president and chief investment officer.
And even though Commonfund executives would like more transparency, the managers they use were "reasonably direct" in giving them information.
"Would I have liked more transparency? Always," he said.
"I can almost guarantee they almost all are more transparent than they were six months ago," Mr. Petzel said in reference to hedge funds.
Another area getting increased attention is credit evaluation departments, where practices might not have kept up with changes in the marketplace, Ms. Rahl of CMRA said.
She noted fully collateralized transactions in some cases were more of a problem than noncollateralized transactions.
That's because in very large transactions, or in situations where the collateral was not liquid, the mark-to-market value of the collateral was set too high for a crisis situation, exactly when collateral is needed, she said.
As a result, executives are beefing up their credit risk management practices, she said.
CMRA's survey showed pension executives have:
* performed a complete review of hedge fund managers;
* tightened investment guidelines;
* talked more frequently with external managers; and
* scheduled investment committee meetings to update members on risk controls.
The survey also showed that 50% of broker-dealers and 30% of banks "acknowledged that they did not have as complete an understanding of their risks as they wanted," CMRA's survey summary states.
But Ms. Rahl said this shouldn't raise a concern for investors using banks and broker-dealers as counterparties to transactions.
Risks aren't out of control at broker-dealers; rather, the risk issues raised this summer are a part of the ongoing learning process of managing risk, she said.
"We get smarter and smarter all the time," she said. But just because risk practices at the big banks and broker-dealers didn't work completely, that doesn't mean they aren't the best available, Ms. Rahl said.
