Comprehensive and comprehendable

A key issue for consultants is that a risk system should not be a “black-box” that cannot be understood. Just as they seek to understand how an investment manager makes investment decisions so they typically seek disclosure of the statistical methods used in a risk system so that they can determine if it is appropriate to the task at hand.

EMA publishes papers that provide a deep insight into the methods used in estimating the factor model and in calculating the various risk numbers. In addition, EMA licenses the software system, the Alpha Toolbox, that generates the standard risk models so that it is possible to check the whole model building process from data input to risk model output.

As many pension clients will have a mixture of core and satellite portfolios it is useful to be able to analyse all of them on a single system both for comparison purposes and to facilitate a holistic view of a client’s investments. EMA’s risk models estimate the risk factors driving all asset classes so that the cross-asset correlations of bonds, equities, currencies and derivatives can be estimated within a single system.

This enables the consultant both to check that the estimated risk level is within appropriate boundaries and that the appointed managers are investing in a manner consistent with their mandates and the underlying clients’ objectives.

As the system is fully extensible with a .NET API this allows the automation of routines and the generation of comprehensive customer risk reports to any number of clients.