Q&A with Amy Wierenga, Head of Risk Management at BlueMountain Capital Management

What is the history and background of BlueMountain Capital? BlueMountain is a multi-strategy absolute return manager founded on the belief that organisational, regulatory, and behavioural constraints generate persistent fundamental and technical asset mispricing. Our investment approach combines deep interdisciplinary financial markets expertise, rigorous risk management, and a collaborative culture in order to create a repeatable […]
28 Jan, 2015

What is the history and background of BlueMountain Capital?

BlueMountain is a multi-strategy absolute return manager founded on the belief that organisational, regulatory, and behavioural constraints generate persistent fundamental and technical asset mispricing. Our investment approach combines deep interdisciplinary financial markets expertise, rigorous risk management, and a collaborative culture in order to create a repeatable investment process that capitalizes on these inefficiencies. Since our founding by Andrew Feldstein and Stephen Siderow in 2003 as a credit-focused relative value manager, we’ve expanded our investment and risk management platforms into adjacent asset classes to broaden and diversify the sources of mispricing that define our opportunity set. Our team of 275 professionals based in New York, London, and Tokyo currently manages $5bn in CLO assets and $15bn in 14 absolute return funds that invest across the capital structure and asset class spectrums.

” Another important objective for risk frameworks supporting multi-strategy funds is that they work well for single strategy risk analysis while also enabling coherent fund-level risk aggregation. We have found that a scenario-centric approach provides an effective and flexible foundation for doing so.”

How is BlueMountain different from its peers?

One of our most distinctive characteristics is how our core values—transparency, intellectual honesty, and cross-team collaboration—directly influence our investment and risk management processes. Our investment model demands a high degree of integration and expertise sharing between strategy managers, including non-investment-making teams. This collaborative and interdisciplinary approach results in better investment decision-making and better risk management.

Our advanced institutional infrastructure that supports trading, risk, operations, and finance also separates us from many of our peers. Hedge fund industry consolidation is a real and likely-to-continue trend, given barriers to entry from new buy-side regulation, prime finance business model regulatory impact, and the overall advantages of scale in securing and deploying investor capital. Our technological capabilities enable us to be nimble in response to these changes, as well as evolving investor mandates and opportunity sets.

What is your approach to risk management?

Our quantitative models are guided by a belief that market data provides a useful starting point for understanding potential volatilities and correlations. That data, however, must be married to intuition from ongoing analysis of changing market structure, behavioral incentives, and other forward-looking factors that give rise to the probability of future dislocations differing from historic or market-implied relationships. A material part of our risk taking lies in parts of the asset class spectrum where relevant historic data is limited or non-existent, which further underscores the importance of blending fundamental investment knowledge and market perspective with data-driven approaches.

“We believe that a holistic risk measurement language that encompasses all of these dynamics is a key ingredient for sound total risk-adjusted-return decision-making.”

Another important objective for risk frameworks supporting multi-strategy funds is that they work well for single strategy risk analysis while also enabling coherent fund-level risk aggregation. We have found that a scenario-centric approach provides an effective and flexible foundation for doing so. We use a holistic suite of scenarios to understand different measures of risk capital, meaning that we quantify internal measures of market risk capital, levered market risk capital, and liquidity risk capital in addition to the actual capital required by the street to execute our strategies under different scenarios.

For example, we operate some strategies that have lower dealer margin requirements than the market risk capital that we associate with them internally. On the other hand, relative value strategies where unlevered assets are traded versus levered assets may require cash levels to fund margin calls that are greater than the net market risk PnL volatility. Still other strategies—particularly in low vol, low liquidity premia environments like the one we’re in now—can look relatively attractive using an expected return versus PnL volatility lens but require normalization for the wrong-way-correlated illiquidity risk they bear, particularly in funds where the duration of capital is shorter and disciplined asset-liability matching is important. We believe that a holistic risk measurement language that encompasses all of these dynamics is a key ingredient for sound total risk-adjusted-return decision-making.

What have been your priorities over the past 12 months?

Given the remarkably low vol environment and the steady march of market liquidity premia back to historic lows, we’ve begun exploring new ways to quantify the degree to which different strategies expose our funds to liquidity premia expansion—and, in turn, the compensation we should require for this risk. Part of this study involves separating systematic risk exposure into fundamental market beta (e.g. default risk) and beta from other factors, and doing so in a harmonised way across positions ranging from liquid bonds to Illiquid structured credit. Commercial applications of this exploration may include the ability to define different absolute risk tolerances and customized Hedging strategies for fundamental versus non-fundamental beta depending on a fund’s risk mandate and capital duration.

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