Risk Management: The Pros And Cons Of Building Your Own System

By Aleksey Matiychenko, Risk-AI, and Alexander Makeyenkov, DataArt

Alexander Makeyenkov, Senior VP of Capital Markets at DataArt, collaborated on a by-lined article for FINalternatives, the premier, independent source for news on the alternative investment industry. The article focuses on the culture, policies and procedures necessary for effective risk management at hedge funds and discusses what it takes to develop internal risk management architecture. Besides the tools necessary for implementing an effective risk management system, Makeyenkov addresses the ongoing debate of Build vs. Buy.

"If anything can be learned from the current crisis it is that risk management needs to be part of a core strategy of any investment firm," writes Makeyenkov. "What this means is that risk management systems need to be part of the core strength of any hedge fund that wants to stand out. For such hedge funds, buying an off-the-shelf product may be a first step in developing risk management architecture, but it shouldn’t be the only step... Depending on the complexity of the fund’s portfolio, the vendor system may not be capable of handling certain instruments. In such situations, the solution may involve either building an internal system to handle these instruments or purchasing an additional vendor system(s).. While ensuring seamless dataflow and building custom reporting that integrates all the systems is a big task in itself, there is an even a bigger issue. At the end of the day, a risk manager needs to have a complete picture of portfolio exposures. Such a picture needs to incorporate correlations among various products that exist in disparate systems. Building a tool to bring all these exposures together is akin to developing a complete risk system from scratch."

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