Buy Side View: Risk Managing in Extreme Market Conditions

Richard Preschern, CEO of Robosig and Co-Founder at FX Vision, talks to Profit & Loss deputy editor, Galen Stops, about the lessons he’s learnt from recent risk events.

Speaking about the volatility following the Swiss National Banks’ decision to pull its peg to the euro, Preschern comments: “What you understand is that the execution that you get during these events is nothing to do with what you model because the market is simply not there.

“So what you have to do in terms of risk management is look at your extreme points in terms of exposure because you just don’t know that you’re going to be able to get out, which is what causes a lot of wreckage in the market.”

The sterling moves following the UK’s referendum decision in favour of leaving the European Union was a very different scenario, as this was a known risk event. However, for such “known unknowns”, Preschern says that he prefers not to take any risk at all.

“I say that if you know there is a slight risk coming that there is absolutely no point to expose yourself or your client to the risk, because it’s gambling. Because if you know you’re either going to lose a lot or take a lot, why take the chance? There is no math to it, no reasoning behind it, no theory behind it,” he says.

However, he says that, from a buy side perspective, such events are still very useful even if his firm is not trading the market because it allows him to test how his trading models would have fared.

“I love these events from a point of understanding the extreme limits of my own model,” says Preschern.

He also discusses the challenges inherent in bringing a new FX trading strategy to market and proving its effectiveness to investors. The first step, says Preschern, is accumulating as much reliable data as possible and then finding patterns that are not only positive but also consistent with the market climate.

Although he concedes that sometimes back-testing gets “a bad name” when it comes to proving strategies, he says that this lab work is still essential when developing and launching new strategies.

Watch the full interview here:

Richard Preschern, CEO of Robosig and Co-Founder at FX Vision, talks to Profit & Loss deputy editor, Galen Stops, about the lessons he’s learnt from recent risk events. Speaking about the volatility following the Swiss National Banks’ decision to pull its peg to the euro, Preschern comments: “What you understand is that the execution that you get during these events is nothing to do with what you model because the market is simply not there. “So what you have to do in terms of risk management is look at your extreme points in terms of exposure because you just don’t know that you’re going to be able to get out, which is what causes a lot of wreckage in the market.”

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