Market Risk Not To Be Ignored Or Overlooked

Market Risk – Not to​ Be Ignored or​ Overlooked
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;
- 2018 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Many jurisdictions have repealed this rule however mutual fund managers have been slow or​ decided to​ continue with ‘business as​ usual .​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.

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