I second what BangBusDriver posted. The best risk managers I’ve met so far are normally the most creative ones… not many of them have CFA nor FRM. They generally have a strong numerical degree i.e. math, engineering or actuarial. More importantly, they can come up with some left field but not totally stupid scenarios…
I can give you some background about my experience. I work in risk management (fixed income and derivatives, no equities) and many of us have engineering backgrounds. Mine is in CE, one is in ME, one is in EE (has a masters in EE as well), one is in Aeronautical (I think he might even have his PhD in some engineering discipline). We all also have MBAs, MSFs and/or MFinMaths. The non-engineers have backgrounds in Economics+MBA, Finance+MBA and Statistics+MBA. CFA isn’t really helpful although it is not looked down upon. Only myself and my manager have ours. It was not a prereq to get the job. For us, the CFA material related to fixed income, mortgages, derivatives and risk management is applicable although nothing you wouldn’t learn in college courses covering the same material. Only my manager has her FRM. I’m probably going to do it although I will have to travel to take it so I’m not sure when I will do it. Again, not a prereq to get the job. Important skills for us: Being able to explain quantitative concepts to non-quantitative people Understanding of bond math, derivative math, option pricing and interest rate models Excel Access VBA SQL is beneficial This probably goes without saying but being able to work with people from different cultures
I like what Bob Litterman said in the foreward of “A practical guide to risk management” by Thomas Coleman, Research foundation of CFA Institute: Having been the head of the risk management department at Goldman Sachs for four years and having collaborated on a book titled The Practice of Risk Management, I suppose it is not a surprise that I have a point of view about the topic of this book. Thomas Coleman, who was, likewise, a risk manager and trader for several derivatives desks as well as a risk manager for a large hedge fund, also brings a point of view to the topic of risk management, and it turns out that, for better or for worse, we agree. A central theme of this book is that “in reality, risk management is as much the art of managing people, processes, and institutions as it is the science of measuring and quantifying risk.” I think he is absolutely correct. The title of this book also highlights an important distinction that is sometimes missed in large organizations. Risk measurement, per se, which is a task usually assigned to the “risk management” department, is in reality only one input to the risk management function. As Coleman elaborates, “Risk measurement tools . . . help one to understand current and past exposures, which is a valuable and necessary undertaking but clearly not sufficient for actually managing risk.” However, “the art of risk management,” which he notes is squarely the responsibility of senior management, “is not just in responding to anticipated events but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations.” The recognition that risk management is fundamentally about communicating risk up and managing risk from the top leads to the next level of insight. In most financial firms, different risks are managed by desks requiring very different metrics. Nonetheless, there must be a comprehensive and transparent aggregation of risks and an ability to disaggregate and drill down. And as Coleman points out, consistency and transparency in this process are key requirements. It is absolutely essential that all risk takers and risk managers speak the same language in describing and understanding their risks. Finally, Coleman emphasizes throughout that the management of risk is not a function designed to minimize risk. Although risk usually refers to the downside of random outcomes, as Coleman puts it, risk management is about taking advantage of opportunities: “controlling the downside and exploiting the upside.” In discussing the measurement of risk, the key concept is, of course, the distribution of outcomes. But Coleman rightly emphasizes that this distribution is unknown and cannot be summarized by a single number, such as a measure of dispersion. Behavioral finance has provided many illustrations of the fact that, as Coleman notes, “human intuition is not very good at working with randomness and probabilities.” To be successful at managing risk, he suggests, “We must give up any illusion that there is certainty in this world and embrace the future as fluid, changeable, and contingent.” One of my favorite aspects of the book is its clever instruction on working with and developing intuition about probabilities. Consider, for example, a classic problem—that of interpreting medical test results. Coleman considers the case of testing for breast cancer, a disease that afflicts fewer than 1 woman in 200 at any point in time. The standard mammogram tests actually report false positives about 5 percent of the time. In other words, a woman without cancer will get a negative result 95 percent of the time and a positive result 5 percent of the time. Conditional on receiving a positive test result, a natural reaction is to assume the probability of having cancer is very high, close to 95 percent. In fact, that assumption is not true. Consider that out of 1,000 women, approximately 5 will have cancer but approximately 55 will receive positive results. Thus, conditional on receiving a positive test result, the probability of having cancer is only about 9 percent, not 95 percent. Using this example as an introduction, the author then develops the ideas of Bayesian updating of probabilities. Although this book appropriately spends considerable effort describing quantitative risk measurement techniques, that task is not its true focus. It takes seriously its mission as a practical guide. For example, in turning to the problem of managing risk, Coleman insightfully chooses managing people as his first topic, and the first issue addressed is the principal–agent problem. According to Coleman, “Designing compensation and incentive schemes has to be one of the most difficult and underappreciated, but also one of the most important, aspects of risk management.” Although he does not come to a definitive conclusion about how to structure employment contracts, he concludes that “careful thinking about preferences, incentives, compensation, and principal–agent problems enlightens many of the most difficult issues in risk management—issues that I think we as a profession have only begun to address in a substantive manner.” Coleman brings to bear some of the recent insights from behavioral finance and, in particular, focuses on the problem of overconfidence, which is, in his words, “the most fundamental and difficult [issue] in all of risk management because confidence is necessary for success but overconfidence can lead to disaster.” Later, he elaborates: “Risk management . . . is also about managing ourselves—managing our ego, our arrogance, our stubbornness, our mistakes. It is not about fancy quantitative techniques but about making good decisions in the face of uncertainty, scanty information, and competing demands.” In this context, he highlights four characteristics of situations that can lead to risk management mistakes: familiarity, commitment, the herding instinct, and belief inertia. When focusing on the understanding and communication of risk, Coleman delves deeply into a set of portfolio analysis tools that I helped to develop and used while managing risk at Goldman Sachs. These tools—for example, the marginal contribution to risk, risk triangles, best hedges, and the best replicating portfolio—were all designed to satisfy the practical needs of simplifying and highlighting the most important aspects of inherently complex combinations of exposures. As we used to repeat often, risk management is about communicating the right information to the right people at the right time. After covering the theory, the tools, and the practical application, Coleman finally faces the unsatisfying reality that the future is never like the past, and this realization is particularly true with respect to extreme events. His solution is to recognize this limitation. “Overconfidence in numbers and quantitative techniques and in our ability to represent extreme events should be subject to severe criticism because it lulls us into a false sense of security.” In the end, the firm relies not so much on risk measurement tools as on the good judgment and wisdom of the experienced risk manager. Robert Litterman
Thanks a lot hezagenius. Your information is very helpful!