Investment Risk Management

This book will explain, from the point of view of the practitioner, the analysis of investment risk - a proper account of adequate risk management strategies - and offer an objective and readable account of the most common investment risk management procedures. It will not be highly mathematical, although mathematical formulae and technical graphs will be used where necessary and will not rely on excessive technical jargon.

Risk has two sides: underestimating it harms the investor, while overestimating it prevents the implementation of bold business projects. This book explains, from the point of view of the practitioner, the analysis of investment risk - a proper account of adequate risk management strategies - and offers an objective and readable account of the most common investment risk management procedures. It will not be highly mathematical, although mathematical formulae and technical graphs will be used where necessary, and will not rely on excessive technical jargon.

The author also covers guidelines of regulatory institutions that protect the market and the investor: Bank of International Settlements, US SEC and UK FSA.

1 Introduction to Investment Risk. Dream versus rude awakening.
Book structure.
2 The Beginning of Risk.
Risk and business.
Case study: The shark and its risk.
Case study: The ruin of Cré dit Lyonnais (CL).
Case study: ABB engineering.
Investment scams.
Banking risk and sharks.
Risk management as a discipline.
Humans and risk.
Case study: High-street retail store losses.
Case study: Allied Irish Bank (AIB).
The state of the investment game.
Risk types.
Reputation risk.
Case study: Equitable Life.
Credit risk.
Market risk.
Operational risk.
Risk and damage.
Viable alternatives.
3 Investing under Risk.
Human behaviour and investment choice.
Portfolio management.
Value-at-Risk (VaR).
Monte Carlo simulation.
Collective use of mathematical tools.
Position keeping.
Investment managerial control.
The treasurer's role.
Trading and risk management.
Investment risk experts.
Case study: A large UK PLC defined benefits pension fund.
Who controls whom.
4 Investing under Attack.
Investor disenchantment.
Risk-bearers and risk-takers.
Professional investor/shareholder.
Investment companies/fund managers.
Investment banks.
Auditors.
A look in the risk mirror.
Risk-averse.
Risk-neutral.
Risk-takers.
Investor analysis.
Types of CEO - birds of a feather.
The CEO eagle - The M&A addict.
The CEO dodo - Risk-phobic.
The CEO ostrich - Risk-ignorant.
The CEO owl - Risk-acceptable.
The CEO magpie - Risk-seeking.
Company structure and risks.
Case study: The executive background check.
Risk vanities.
Pensions mis-selling.
Case study: Boo. com.
Corporate misgovernance.
Accuracy of corporate losses.
Classes of instruments and their risk components.
Derivatives.
Bonds.
Equities.
Investment as a project.
5 Investing under Investigation.
Instinct versus ability.
Checking corporate fundamentals.
Formulate a business plan.
Due diligence.
Risk support and methodology.
Investor cynicism.
Case study: LTCM.
6 Risk Warning Signs.
Prevailing risk attitudes.
Reputational risk.
Case study: Enron.
Airborne early warning (AEW).
International accounting standards (IAS).
Credit ratings.
The ratings procedure.
Business lines.
Law and risk management.
Case study: the UK Football League.
What the law covers.
Completeness of contract.
Case study: Merrill Lynch versus Unilever pension fund.
Sarbanes-Oxley Act for audit control.
Insurance.
Risk retention: self-insurance.
Case study: Insuring big oil projects.
Case study: the Names and Lloyds, London.
Sharing, transferring or mitigating risk.
Search for risk management.
Alternative theories.
Causality and managing investment risk.
Value-added chain.
Risk management to pick up the pieces.
Scenario analysis.
Case study: Business Continuity, lessons from September 11th.
Case study: Guaranteed annuity payments.
Stress testing.
Bayesian probability.
Artificial intelligence (AI) and expert systems.
Case study: Anti-money laundering.
Risk maps.
7 The Promise of Risk Management Systems.
Current state of systems.
Risk management methodology - RAMP.
Activity A: Analysis and project launch.
Activity B: Risk review.
Activity C: Risk management.
Activity D: Project close down.
Financial IT system support.
The Basel II Loss Database project.
Case study: Algorithmics systems in a bank.
Integration and straight-through processing (STP).
IT systems project failure.
Case study: IT overload.
Tying financial system functionality to promise.
Risk Prioritisation.
Giving the go-ahead.
Building risk management systems.
Finding the "best" risk management system.
The invitation to tender (ITT) process.
Business functionality requirements.
User's functional priorities.
Business flirting - the user's system specification.
Business flirting - the supplier's reply.
Judging the ITT beauty show.
System priorities.
Project life cycle.
Risk management project plan.
A - Our risk strategy.
B - Risk review.
C - Risk management.
D - Project close down.
8 Realistic Risk Management.
Intentional damage.
Fraud, theft and loss.
Fraud perceived as the main criminal threat.
419 - not a number, but a way of life.
Operational risk in emerging markets.
Parachuting in the experts.
Case study: Chase Manhattan in Russia.
Unintentional damage.
Case study: Split capital investment funds.
Rogue staff.
Exposure to fraud at the top.
Exposure to fraud lower down the rung.
Case Study: Deutsche Morgan-Grenfell, 1996.
An operational risk perspective.
Operational risk protection: the "roof".
Investment project growth.
Phase 1: High skill.
Phase 2: High performance.
Phase 3: Client growth.
Phase 4: Asset growth.
Case Study: Soros Quantum Fund and Buffett's Berkshire Hathaway.
Phase 5: Skill decline.
Investor risk skills.
Investment management skills in the market.
Hiring star managers and CEOs.
Investment managers and governance.
Creating a winning fund management team.
Building for investment resilience.
Moving ahead from the investment herd.
Recap on operational risk.
9 The Basel II Banking Regulations.
Current banking problems.
Basel II - a brief overview.
1 Pillar one: Capital requirements.
2 Pillar two: Supervisory review.
3 Pillar three: Market discipline.
Cost-benefits under Basel II.
Risk for financial institutions and insurance.
The Basel II OpRisk principles.
Loss database.
Loss database drawbacks.
Scenarios for Basel II OpRisk.
Next steps: After Basel.
10 Future-proofing against Risk.
Moral hazard.
Risk detection.
Case study: Marconi.
Risk countermeasures.
Case study: The Yakuza and shareholder meetings.
Risk firepower.
Case study: Huntingdon Life Sciences (HLS).
Insurance: the buck used to stop here.
Risk monitoring.
Case study: WorldCom.
Forensic accounting.
Appropriate risk management structure.
Case study: BCCI bank.
Facts, not figures.
New risk focus.
11 Integrated Risk Management.
Developments in the finance sector.
Organic risk management.
Separating reputation from risk management.
Case study: Enron.
Future for risk management.
The case for organic risk management.
Case study: Hunting for staff deceit.
Unintentional (ostensibly) and legal.
Intentional and illegal.
The reigning investment ideology.
12 Summary and Conclusions.
Summary of risk management.
Identify stakeholders and interests.
Match risk appetites.
Match risk time horizons.
Organic due diligence.
Value for money.
Reputation risk.
The corporate governance model.
Hitting back.
Keep your eyes on the prize.
Conclusions.
Index.