March 2010

RISK MANAGEMENT: Matthew Weir, Bluecrest Capital

Matthew Weir, Bluecrest Capital: “We have a set of daily reports that include VaR measures, sensitivity analysis and stress tests. We look at the liquidity and concentration risk at all levels within the organisation..." matthew_weir.jpgMatthew Weir was appointed as the chief risk officer (CRO) at London-based hedge fund BlueCrest Capital in August 2009. BlueCrest has offices in New
York, Singapore and Boston, as well as the head office in London, and is planning an office in Geneva. In total there are 13 dealing desks in all working on a variety of trading strategies.

Weir is responsible for monitoring the risk faced by all of BlueCrest’s various funds and dealing desks and this is achieved through three main processes. The first is to run regular risk reports that cover the whole of the company and all of its exposures. In addition to this primary role, Weir also has to regularly communicate with the company’s traders and to communicate his findings to senior management and throughout the rest of the organisation.

“We have a set of daily reports that include VaR measures, sensitivity analysis and stress tests. We look at the liquidity and concentration risk at all levels within the organisation including trader, desk and fund level, and we impose risk limits on each individual trader based on their stop losses – if they lose more than a certain percentage of their allocated capital in a year we will first halve their capital allocation and then, if the losses continue, we will withdraw their allocation of capital so that they cannot trade anymore.”

In addition to these rigid limits, Weir and his team also use a system of risk flags including stress flags to raise early awareness of potential trading risks and which involve a discussion with the trader. These discussions occur daily but are complemented by a series of monthly meetings where traders discuss their top five investment strategies and the risks that exist.

Internally the organisation is divided up into desks according to the different trading strategy – credit trading, relative value trading, rates trading and so on. “Each of these desks has different characteristics so you have to assess the risks in different ways. For example, on an emerging market desk we would look at the loss given default by region and the level of leverage that the traders are working with.”

In order to cover the various different desks, Weir has a team of seven risk managers, each with their own specific skills, be it quantitative trading or credit portfolios. “I have allocated specific trading desks to each one and they have to liaise daily with those desks and produce one-page reports which we send out to senior managers on a daily basis that highlight the key risks. It also allows each risk manager to build up a relationship with the traders, something which Weir acknowledges is critical to the role.

“The traders are typically the ones that understand the market the most so will give you the best information. The skill for a risk manager is to get all of the relevant information you need from the traders but still retain that independence. The best way to do that is to add value to the business. If you can provide them with relevant and useful information on a real-time basis, you will get their buy-in and will be able to build that relationship.” It is a task that is easier to do in a hedge fund environment rather than the banking side, says Weir, because as partners you are all essentially batting for the same side.

Weir has previously worked on the investment banking side with Credit Suisse First Boston and then in hedge funds with Brevan Howard and Newsmith Capital Partners before moving to BlueCrest. “There’s a different skill set involved when managing risk at a hedge fund. It’s a much smaller team so I’m doing everything from the reporting to meeting external investors as well as communicating everything throughout the company.”

There is a relative shortage of senior risk managers in the hedge fund industry, says Weir, not least because it can be difficult to adjust from working at a senior level at a bank to operating at grassroots level again. “It is a big change and one I think you have to make at a certain age or you risk being too senior with the wrong skill set to take over those roles. But someone who has had a few years experience at a bank is often perfect to make the transition to a junior level in the hedge fund industry because they have the core risk training.”

So what makes a good CRO? “You have to have good oversight, be able to communicate, be flexible and be able to react to changes in the market. It is not something you can learn form a text book, it is more about practical application. I think you have to experience some stressful market events and learn from them.”

©2010 funds europe

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