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| This Issue |
| Change in Risk Management Requirements |
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| Stress Test Your Way to Success |
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| Introducing Savings Calculator |
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| About Us |
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| —Welcome to the first issue of our quarterly journal of risk management! |
| — In this issue, we will discuss how recent regulation will effect risk management and compliance procedures, examine the concept of stress testing, and introduce a new, free tool called the Savings Calculator. We will cover new topics every quarter. I hope you will find the newsletter helpful and thought-provoking. Feel free to call or email with any questions and please forward this letter to your friends and colleagues. |
Warmest Regards,
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| VALENTINE MOROZ |
| CEO and FOUNDER |
| Bluefront Capital LLC |
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| Change in Risk Management Requirements |
| Introduced by the U.S. Financial Reform on July 21, 2010 |
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—On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. A good summary of the new legislature is available at http://banking.senate.gov/public/_files/
070110_Dodd_Frank_Wall_Street_Reform
_comprehensive_summary_Final.pdf. |
| —The bill expands government’s authority over large financial companies in order to foresee and possibly prevent a new economic crisis. The regulator is the newly established Financial Stability Oversight Council. Its prime goal is to promote market discipline and identify and respond to risks to the financial stability of the United States. |
| — The Council will designate the “systemically important nonbank financial companies”, whose distress would impose serious threats on the financial health of the country. Together with bank holding companies with more than $50 billion in assets, these Designated Companies will be subject to the heightened prudential standards with regards to risk-based capital, leverage limits, liquidity requirements, resolution plans, credit exposure requirements, and concentration limits. |
| — To enforce the heightened standards and assess such companies, the Council may request submission of the certified report on a |
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| company’s financial condition, risk management systems in place, and its potential impact on financial markets. Systemically important companies (both bank and nonbank) will be subject to annual stress tests under baseline, adverse, and severely adverse scenarios conducted by the Federal Reserve. Self-stress testing under the same scenarios must be performed and published by all the financial companies with more than $10 billion in assets. |
| — Publicly traded nonbank financial companies and publicly traded bank holding companies with total consolidated assets of $10 billion or more are required to establish risk committees to promote sound risk management practices. At least one risk management expert, "having experience in identifying, assessing, and managing risk exposures of large, complex firms", must be present at such committee. |
| — To allow the market to evaluate the risk profile, risk management, and capital adequacy of the systemically important (both bank and nonbank) companies, Federal Reserve may prescribe the public disclosure of the relevant information. |
| —Overall, more transparency in reporting and more stringent demands to risk management discipline should be expected to become the standard in the nearest future. |
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Bluefront Capital |
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| Our Services to Investors and Asset Managers Include: |
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Hedge fund due diligence and consulting |
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Investment valuation |
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System Development
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Risk management |
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Marketing materials |
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Algorithm development |
| Second Anniversary Celebration |
| September marks the 2nd anniversary of Bluefront Capital LLC. In order to commemorate this important event, we plan to arrange a great party for a close circle of our employees, partners, and, of course, clients. Prospective clients are very welcome to come. Please email us for details. |
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| Stress Test Your Way to Success |
| “Similar to testing people that you hire, you need to test your portfolio for resilience in a crisis situation.” |
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| — A very popular way to test the limits of a potential employee is to make this person endure staged stressfull situations. People fear extended silences or stares , unexpected tasks or strange behavior of the interviewer. This helps in revealing and assessing something that was not prepared and rehearsed in advance: how a newly hired employee will probably act when faced with a problem. |
| —Similar to testing people that you hire, you need to test your portfolios for resilience in a crisis situation. Stress testing, as a risk management technique, is widely implemented to measure the response of the subject position, instrument, asset class, or portfolio, to extreme changes of a particular factor, or to an impact of a specific crisis scenario. Stress testing is crucial to risk management, despite the fact that statistically such scenarios, or significant factor changes are unlikely and usually when they do occur, they are different from the ones that happened in the past. |
| —As it is often compared, the probability of fire completely destroying your house is low, yet you buy insurance to protect your savings and well being. Similarly, the probability of severe financial crisis at any given day is low, but stress testing allows you to estimate the potential behavior of your portfolio value and be prepared for it. |
| “System support delivered by Bluefront Capital has exceeded our expectations.” |
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| — Stress testing is essentially an attempt to model and measure the effect of changes in the relevant market factors on the performance of an instrument, portfolio, entity, or the entire economy. If only one factor is changed, we focus on specific factor and call it sensitivity analysis. If a number of interconnected factors in a scenario are effected, whether they existed in the past or are hypothetical, the procedure is called "Stress Test Scenario Analysis". To perform a stress test, you must: |
| √ Identify the scope of the test, whether you want to test the portfolio or a particular slice |
| √ Determine the factors relevant to the portfolio performance and strategy |
| √ Estimate the co-influence of the factors on each other and model their effect on the portfolio value |
| √ Shock the factors separately and together to measure their effect on the portfolio |
| — Naturally, this process involves trial and error, follow-ups and corrections. However, the clear advantages make it a necessary part of wholistic risk management. |
| Stress testing: |
| √ Measures the loss from extreme but plausible events not captured by VaR |
| √ Identifies the relevant factors and the effect of their changes |
| √ Assesses the resilience of the portfolio in the situation of crisis |
| √ Allows for the development of "what if" scenario based on subject matter expert’s opinion |
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| —Stress testing is not free of disadvantages, and risk managers needs to be cautious as the flaws include: |
| √ Estimates are only as good as the model itself simplification may result in significant approximations |
| √The relationships between the unique factors affecting the portfolio are hard to estimate |
| √ Even if estimated initially, the correlations between factors do not stay constant |
| √ Crisis never repeats precisely, so old scenarios may not be fully valid and new ones are hard to construct and are hypothetical |
| —The cost of handling these disadvantages can be reduced by using third-party risk data providers like RiskMetrics, Measurisk, Investor Analytics and more directly by allowing specialized risk management vendors to |
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| develop, run, and manage the risk of your portfolio. |
| — When you test people at a job interview, there is no guarantee that the candidate, who knows how to spot counterfeited coins amongst 10 sacks of money, is the one who will actually perform best under pressure. |
| — Similarly, stress testing is not designed to give the precise answers but without it, portfolio managers are left blinded with regards to factors affecting the portfolio and hence unprepared for crisis. |
| “Outsourcing risk management to Bluefront Capital made us think about this partnership as both money saved and money earned.” |
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Earn Your Rewards Through Our Client Referral Partnership |
| —Celebrating two years in business this month, we appreciate our Referral Partners who have helped us leap-frog through our “startup” stage and grow our business. We look forward to seeing you soon and hope you are doing well! |
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—We highly value our relationships and continue to reward our Referral Partners for their help and support . If you share in our core principles and also put a high value on business relationships, we want to hear from you. Please contact us to discuss entering a strategic partnership by emailing:
info@BluefrontCapital.com. |
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| —Featured Tool of this Month: A Free Savings Calculator |
| Bluefront Capital LLC has created a savings calculator that helps companies identify savings opportunities in outsourcing of financial management, operations, and back-office functions. |
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| —The calculator helps companies understand what financial procedures they can outsource and what savings they can realize by leveraging the financial services and proprietary technologies of Bluefront Capital. |
| —In particular, the calculator helps Money Managers identify saving generated in outsourcing risk management. This tool encourages companies to look at their costs and decide whether outsourcing efforts would improve efficiency and margins. |
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| —The savings calculator www.bluefrontcapital.com/calculator – went live on July 7th. |
| —“We are empowering companies to find the lowest rates available without compromising their quality of services. That is why we encourage companies to compare their current in-house financial management, operations, and risk management cost with the cost of outsourcing them.” said CEO and founder of Bluefront Capital, Valentine Moroz.. |
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PAGE 4 |
| About Bluefront Capital |
| —Bluefront Capital is a corporate finance advisory firm dedicated to providing cost-effective solutions to business owners, investors and money managers at various stages of business development and investment processes. The firm services three distinct parts of the business ecosystem: |
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Companies in need of financial advisory services, financial process outsourcing, business development and strategic help |
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Traditional money managers, hedge funds, funds of hedge funds and institutional investors in need of operational and risk management support |
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Public companies who wish to allocate to alternative investments and/or buy smaller companies in order to expand their product/service |
| —Please, visit our website for detailed information about our services and competitive pricing strategies. Also, feel free to contact us at info@bluefrontcapital.com with any further questions and inquiries about the services. |
| —Please contact our Corporate Communications department at PR@bluefrontcapital.com with any comments and suggestions for the upcoming issues of our quarterly financial services journal "Bluefront Capital News. Hedge Fund Services Edition". |
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Extensive professional experience in financial strategy, risk management, research, outsourcing, systems and technology |
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Multinational management team, fluent in key languages, and available 24/7 |
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Bottom Line: We think of our clients as our Partners in the economic battlefield. We align interests, so that we can grow together |
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| Bluefront Capital News |
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244 Fifth Ave | Suite V222 | New York, NY 10001 |
www.bluefrontcapital.com |
(646) 755 9833 |
| Issue 01 |
September 2010 |
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