Active Risk Management: A Credit Investor’s Perspective

Vineer Bhansali

The credit crisis which began in 2007 taught us many lessons about the importance of the “robustness of process” of risk management. As the crisis metamorphosed from a relatively isolated area of mortgages to the financial sector to corporates and ultimately to sovereign credit, we learnt some important principles that will impact on portfolio construction in fundamental ways. This chapter will provide a credit investor’s perspective on tail-risk management of credit portfolios.

The most important lesson learnt is that, though the details of this crisis were different, in many ways the recent episode also had striking similarities to past crisis events. Among these similarities is the central role played by de-leveraging, illiquidity and flight to quality. Once again, the central importance of equity and funding markets to other markets was revealed. Asset prices became increasingly correlated, and the ability to anticipate even short-term portfolio returns for risky securities became impossible. The response from aware investors required a delicate balancing act: one that is conscious of the elements that persist through these recurrent crises yet is flexible in its response to