Strategic insight underpins everything we do. In order to determine what to do about financial risk it’s key to understand what that risk is, how it can affect your business or investment case, and how you can most effectively and efficiently manage that risk. We utilise a simple but powerful methodology across all asset classes:
Identify and Quantify risks
Detailed risk identification is important to understand the nature of financial risks and how they impact the specific dynamics of each business/investment case. We work closely with our clients to gather the required intelligence, which is then used to pin-point key risks and create an overall model of exposures. Using probabilistic modelling we are able to measure the risk against tangible KPIs, such as change in investment performance (typically IRR), or free cash flow.
Knowing the effect the identified risks may have is a key step towards deciding what to do about it. We assist clients in determining risk management objectives, such as desired level of protection / risk appetite, defined cost limits and available liquidity capacity.
Design risk management solutions
Based on established KPIs we design a number of hedging strategies that are aimed at meeting objectives in different ways. This can involve natural hedging arrangements, capital structure changes, or the use of financial derivatives such as forwards or options. It is crucial that the specific idiosyncrasies of the client is taken into account, instead of applying generic overlay strategies. Many close-ended funds have experienced disastrous results when attempting to hedge exposures with strategies not specifically designed for them.
Compare cost/benefit and optimise
Because we create a model of exposures we can apply all hedging strategies ex-ante to see how they impact the defined KPIs. This allows us to produce a cost/benefit analysis of all the solutions and define the one that best suits our client’s needs. Calibrations can then be applied to optimise areas such as hedge ratio and tenor, or mitigate other uncertainties, such as the risk of having to post large amounts of cash collateral or the risk of underlying investments not performing.