JPMorgan’s Gamble on Value at Risk

Managing risk is difficult. It takes time and continual effort, and even then no risk management system can be perfect. How do you price the risk of a trade becoming so large it warps the very thing it is trying to trade? Or the risk that your losing trade becomes known to the outside world and they line up to make you pay extra to get out of it? There are just so many inputs and possibilities, that it sure would be nice if the whole process were simplified – say, by boiling all the risk possibilities down to a single number perfectly represents a firm’s potential losses over any one day, week, month, etc.

Enter Value at Risk (VaR), a metric that tries to express how likely it is for a firm to lose a given amount of money over a particular period of time. For example, a daily 5% VaR of $10 million means that there is a 95% chance that the firm’s losses on any given day will be less than $10 million. Sounds nice, but unfortunately, like most things that sound too good to be true, it probably is.

There have been hundreds, if not thousands of articles, blog posts, books, etc. calling out VaR as useless… Some were written before the 2008 financial crisis, and many more after. The number of critics that have been railing against VaR for years is staggering:

So when we heard that JPMorgan, the world’s largest and generally most respected bank, declared a staggering $2 billion loss, we were floored to find out how they were measuring risk:

JPMorgan also changed how it calculates so-called value at risk, or VAR, a measure of how much the company estimates it could lose on securities on 95 percent of days. The company restated its VAR for the first quarter, previously disclosed at $67 million, at $129 million. The bank used a new model for calculating its trading risk in the first quarter that Dimon said was “inadequate.” It is reverting to the old model.

A few things about this strike us. First of all, you’re still using VaR? Where were you the day they taught “lessons from the 2008 financial crisis?” Second, if JPMorgan, the supposedly most risk-centric and well-run bank out there, is doing things this dumb, what are the other banks doing? And lastly… they’re reverting to the old model? Most critics of VaR aren’t just saying it’s poorly executed, but that it’s a terrible idea in the first place. So JPM’s plan is to try it again with the older model? Fool us once, shame on you. Fool us twice…

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Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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