How is risk management assessed in investment?

Unfortunately, there are no such things as risk free investments. Usually, the higher the risk an investment proposes the higher the gains it can give to investors, if it is successful. The flipside side is that there is a higher chance that the investment fails and your money is lost.

To calculate the risk involved with investments risk management is undertaken to try and more accurately consider the factors which affect an investment. By analyzing market and credit risks that the bank or its customers take on their balance sheets during transactions or trades, risk can be assessed and managed.

Market risk is assessed by reviewing trading activities by using the VaR model giving hedge fund information to the managers. Depending on the bank there could be operational, country and other risks.

In capital market transactions or investments which involve debt structuring, loan amendments, leveraged buy-outs, exit finances, measuring credit risk solutions is critical.

Hedge fund firms such as Moore Capital Management, owned by Louis Bacon, use the ‘investable index’ which is the hedge fund’s version of the FTSE 100 share index. This allows them to calculate risks of investments by using qualitative strategies (using the manager’s judgement) or quantative calculations using computer programmes.

In simplistic terms, risk for the investor should be calculated by the amount of money required to be invested and whether they can afford to lose that amount. Yes, the potential rewards may be huge but if the event of success is so slim then it shouldn’t even be considered an investment opportunity.

Investment is a form of gambling, there are no sure things. By building a portfolio of investments which combine high risk and low risk investments it might lower the amount you could see returned in profits but it will also dramatically the reduce the risk to your investment.

Like a bank account, interest on investment often depends on the length of time you are willing to commit to the investment. Any less than five years and you might have to accept that only a riskier investment will offer the types of returns you are looking for.

Advice should be sought before making an investment with an independent financial advisor. This way they can help draw up a profile as to the type of investor you are and try to find projects which match the level of risk you are prepared to accept.

Are you ready to make an investment?

If you’re lucky enough to have some surplus finances to spare, and you’re willing to take a gamble, investments could allow you make money but only if you play the game correctly. While the dream would be to make a huge profit for little effort, the reality is you need to put work into understanding the basics in order to make wise decisions on your investments.

There are four main investment types known as ‘asset classes’. These include cash (normally in your bank, shares (you buy a stake in a company), fixed interest securities (loaning money to a company) and property.

These are the main types of investments but others include commodities, foreign currency, contracts for difference (betting on shares gaining or losing value) and collectibles.

If you build up a collection of investments this becomes known as a portfolio. By spreading your money across a number of investments it increases the chances of success and reduces the effect of a poor performing asset.

The value of assets can fluctuate depending on the type of asset held. Fixed interest securities, shared and property all change depending on their different market values but tend to grow slowly over the long term, choosing the right one initially is the key.

Depending on the type of investment, profit is paid out in different forms. These include: interest dividends, rent, capital gains or losses (profit from when you sell the asset).

Another factor affecting the possible gains from an investment occur if you want to access to your money easily at short notice or a secure guarantee that you won’t make a loss. This creates risk for banks and the people who you have invested with, therefore they reduce the amount you can make in profit as they are footing more risk.

If you have over $1m in the bank or earn $200,000 a year you could even be eligible to invest a hedge fund whereby successful managers, such as Louis Bacon CEO of Moore Capital Management, invest your money on your behalf across a diverse portfolio of investments. This relies on finding the right manager to invest your money.

No-one likes the idea of risking their money but unfortunately, investment is a risk. The greater the risk you are willing to take, the higher the rewards for your bravery but the higher the risk, the more chance there is you could lose your money. It is always worth researching the risks of investments thoroughly before you commit.