![Page 1: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/1.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Turbulent
Violently agitated or disturbed; tumultuous: turbulent rapids.
Having a chaotic or restless character or tendency: a turbulent period in history. Causing unrest or disturbance; unruly: turbulent, revolutionary undercurrents.
![Page 2: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/2.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia, Washington Mutual, National City, Goldman Sachs, AIG, Morgan Stanley, Bank of Iceland, Fifth Third, Comerica, GMAC, Barclays, Northern Rock, Fannie Mae, Freddie Mac, Constellation Energy, Citigroup, Credit Agricole, Societe Generale, Nataxis, UBS, Credit Suisse, IndyMac Bank, National Bank of Greece, Sachsen, Countrywide, GM, Viacom, Chrysler LLC, General Electric, Ford Motor, KeyCorp, Regions
![Page 3: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/3.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
• MSCI World Index: (24) %• S&P 500: (19)• Russell 2000: (10)• International Stocks: (29)• Emerging Market Stocks: (36)
Virtually every stock market in the world is down double digits in 2008.
![Page 4: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/4.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
• Hedge Fund Aggregate Index: (9.90) %• Global Macro Index (2.10)• Long – Short Index (13.3)• Event Driven Index (9.30)• Managed Futures Index 6.70
Most ‘safe’ hedge fund strategies lost value in 2008
![Page 5: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/5.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
• TED Spread• Negative Treasury Yields• Negative TIP Yields• Muni v. Taxable Yields• ‘Breaking the Buck’
![Page 6: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/6.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
![Page 7: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/7.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Signs of Turbulence
• TARP• Temporary Guarantee Program for Money Market • Term Securities Lending Facility• FDIC Coverage Expansion• Commercial Paper Funding Facility
![Page 8: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/8.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
‘Investing In Turbulent Times’
• The Perfect Storm• Risk Management Fundamentals• Going Forward
![Page 9: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/9.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
‘Investing In Turbulent Times’
• The Perfect Storm• Risk Management Fundamentals• Going Forward
![Page 10: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/10.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
The Perfect Storm
• Irrational Optimism• Uneven Regulatory System• Emergence of Complex Securities• Absolute Low Level of Interest Rates
![Page 11: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/11.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Complacency and Optimism
0
5
10
15
20
25
30
35
40
45
50
1/2/
2004
3/2/
2004
5/2/
2004
7/2/
2004
9/2/
2004
11/2
/200
4
1/2/
2005
3/2/
2005
5/2/
2005
7/2/
2005
9/2/
2005
11/2
/200
5
1/2/
2006
3/2/
2006
5/2/
2006
7/2/
2006
9/2/
2006
11/2
/200
6
1/2/
2007
3/2/
2007
5/2/
2007
7/2/
2007
9/2/
2007
11/2
/200
7
1/2/
2008
3/2/
2008
5/2/
2008
7/2/
2008
9/2/
2008
The VIX – The Fear Gauge
“No Fear”
“Panic”
![Page 12: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/12.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Uneven Regulatory System
Unregulated Institutions• Hedge Funds / Private Equity• SWF
Regulated Institutions• Banks• Insurance Companies• Thrifts
![Page 13: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/13.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Variety of Regulatory Agencies
Treasury Department• OCC
Independent Agencies• FDIC• Federal Reserve• SEC• CFTC• FASB / GASB• PCAOB• FINRA
![Page 14: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/14.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
How Much Complexity?
![Page 15: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/15.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
“Behind AIG’s Fall, Risk Models
Failed to Pass Real-World Test”
Headline in WSJ – 11/3/08
![Page 16: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/16.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Absolute Low Level of Interest Rates
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08
One Month Bills
![Page 17: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/17.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Pension Plan Returns (Assumed!)
GE 8.50%
DOW CHEMICAL 8.30%
EXXONMOBIL 9.00%
KELLOGG 8.90%
WHIRLPOOL 8.50%
BOEING 8.25%
![Page 18: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/18.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
‘Investing In Turbulent Times’
• The Perfect Storm• Risk Management Fundamentals• Going Forward
![Page 19: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/19.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
What Is Risk?
![Page 20: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/20.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Risk:
exposure to the chance of injury or loss; a hazard or dangerous chance: It's not worth the risk
![Page 21: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/21.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
What Is Risk?
![Page 22: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/22.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
“To me, risk management is not about measurement at all. It is how we make decisions. What matters in thinking about risk is the quality of the decisions we make in the face of uncertainty.”
‘Risk: The Hottest Four-Letter Word in Financial Markets’
-Peter L. Bernstein 2006
![Page 23: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/23.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
A Return To Risk Management Principles
• Management• Measurement• Oversight
![Page 24: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/24.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Management of Risk
• Fiduciary Responsibility• Approved Policies• Independent Oversight• Defined Structure• Consistency
• Education and Resources• Understand Key Risks• Setting Risk Limits• Routine and Exception
Reporting
![Page 25: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/25.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Risk Management Cycle
Frequent• Cashflow • Positions
Annually• Assess Environment
– State Fiscal Situation
– Enrollment
– Fund Balance
• Review Policies
![Page 26: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/26.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Measurement of Risk
• Valuation Procedures• Measurement and
Attribution• Risk Adjusted Returns
• Stress Testing• Back Testing• Assess Model Risk
“Not Measured, Not Managed”
![Page 27: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/27.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Oversight of Risk
• Due Diligence• Independent Review• Review Processes
![Page 28: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/28.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Ten Commandments of Risk Management
1. Training
2. Self-Assessment
3. Written Policies
4. Independent Oversight
5. Simulation
6. Mark to Market
7. Establish Reserves
8. Establish Limits
9. Define Roles and Responsibilities
10.DEW
![Page 29: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/29.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
‘Investing In Turbulent Times’
• The Perfect Storm• Risk Management Fundamentals• Going Forward
![Page 30: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/30.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Going Forward
Inflation Fiscal Policy ?? Monetary Policy
Recession/Deflation De-Leveraging Plunge in Commodity Prices Asset Write-offs Re-Regulation Constrained Credit TIP Spreads
![Page 31: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/31.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Forward Curve Data
Current FWCV ChangeOne Year 1.24% 1.49% 0.25%
Two Year 1.37% 1.72% 0.35%
Three Year 1.56% 1.93% 0.37%
Four Year 1.75% 2.81% 1.06%
Five Year 2.48% 3.24% 0.76%
![Page 32: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/32.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Accomodative Monetary Policy
Fed Funds Target: 1.50%
Inflation (PCE) -2.40%
Real Fed Funds Rate -0.90%
![Page 33: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/33.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Portfolio Construction
• Return on Capital v. Return of Capital• Watch Key Risks:
– Market Risk– Credit Risk– Headline Risk
• Diversification
![Page 34: MCCBOA November 6, 2008‘Investing In Turbulent Times’ Turbulent Violently agitated or disturbed; tumultuous: turbulent rapids. Having a chaotic or restless](https://reader030.vdocuments.mx/reader030/viewer/2022032707/56649e365503460f94b262dc/html5/thumbnails/34.jpg)
November 6, 2008 ‘Investing In Turbulent Times’ MCCBOA
Bibliography
• In An Uncertain World, Robert E. Rubin• The Black Swan, Nassim N. Taleb• The (Mis)Behavior of Markets, Benoit Mandelbrot