Applied Research Forum on Asset Management

Thursday, 26 November 2009
8.15am – 2.00pm
Casuarina Ballroom, Shangri-La Hotel, Singapore


Low market volatility may hide growing risks: forum

By Oh Boon Ping
27 November 2009
Business Times

Aberdeen strategist says risk is inversely proportional to volatility.

LOW market volatility should be viewed with suspicion as it could disguise growing risks that have gone unnoticed, speakers said yesterday at a forum organised by NUS Business School.

Peter Elston, a strategist at Aberdeen Asset Management, said that the best and most reliable returns have followed periods of high volatility, while lower returns were often made in an environment of low volatility.

Mr Elston ran a correlation between two-year returns on the S&P 500 and the VIX index - and found them positively related.

He said that perceived stability in the past is no indication of stability in the future. Therefore, the conclusion is that 'risk is inversely proportional to volatility, not directly proportional'.

The use of historic data to assess investment risks also came under criticism from David Dredge, managing director of hedge fund Artradis.

Mr Dredge said the reality is that extreme events like the recent credit crisis do happen, and fund managers should assess risks based on the impact on their portfolios rather than measures such as value-at-risk, which are often based on historic data.

Noting the effects of negative compounding, Mr Dredge suggested that it is more important to 'overperform on the downside and underperform on the upside' to hedge against the effects of market slump.

Another speaker, Professor Paul Embrects, from ETH Zurich, said quantitative finance models are commonly misused by practitioners. Prof Embrects suggested that managers examine their analyses to check if they take into account any uncertainty on whether the models used are appropriate.

Govt stimulus measures are causing systemic risks to build up: analysts
By Ryan Huang
26 November 2009
Channel NewsAsia  

SINGAPORE: Experts said the massive stimulus measures put out by governments to bolster their economies are causing systemic risks to build up and that may lead to yet another crisis.

But they said there are ways to minimise the impact such as by improving risk management in the global financial system.

Risks could be building up in the global economy even as the effects of last year's financial crisis wear off.

According to experts, one of these could be the effects of the near zero-interest rate policy by the US.

Peter Elston, strategist, Aberdeen Asset Management, said: "This is causing all sorts of problems. Not the problems that we are aware of that, but problems that we will be aware of down the road. Whether it’s the zero interest rate policy, or this quantitative easing whether its fiscal stimulus - this massive increase in government borrowing that we're seeing - these are causing risks to build up in the system.

“But essentially, government meddling in the economy causes all sorts of risks to build up. When are we going to become aware of those, when are they going to manifest themselves, it may not be for another two to three years but certainly they are causing risks to build up."

Some experts said the US policy of keeping the cost of borrowing low to boost the economy could ironically be fuelling new asset bubbles elsewhere as investors chase higher-yield investments.

Some observers believe the next crisis will be a matter of time but said there are ways to minimise its impact.

They said lessons learnt from the previous crisis include the need for warning systems such ensuring that banks meet capital requirements and monitoring the trading of financial products.

Professor Paul Embrechts, ETH Zurich, said: “Markets should be aware of volume of certain products being traded especially if these products are off balance sheet or not traded on a specific market.

“So the ones that are sort of hidden and at huge amounts they should be aware of those.”

“An important warning is volume, if you're talking about the credit default swap market, you're talking about US$50 trillion nominal value - then you're talking something close to the world GDP.”

“If you talk about US$500 trillion over the counter products, then you talk about eight times the world GDP, these are big numbers.”

For retail investors, experts recommend that they be aware of these risks and position their portfolios accordingly.

They said the best way that retail investors can protect themselves is to avoid investing in complex products and to put money in companies with simple business models and sound fundamentals.