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.