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| Worthy Notions: From the Editor |
Alternative Lifestyle
Dwight Cass
10/01/2005
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One of the conundrums for Worth readers and the wealth managers who advise
them is the enormous degree of financial risk they bear, often unbeknownst to
them, due to their privileged access to alternative asset classes like hedge
funds, private equity and structured products. These vehicles are some of the
financial firmament’s brightest stars, but they are also among its most
perilous.
 Fortunately, alterative investments infrequently go supernova, and
then usually during times of severe market stress. It has been eight years since
the last serious global financial shock—the Asian/Russian/Long-Term Capital
Management crisis, which shuttered scores of hedge funds, for example. Since
then, the pace of financial innovation has accelerated. Indeed, the market for
principal-protected bespoke structured products for private investors barely
existed when currency speculators forced Thailand to float the baht in mid-1997.
Now it is a market worth hundreds of billions of dollars. Do you like biotech
stocks? Today, you can pick a basket of 15 that will pay you 75 percent of the
upside of the best-performing five after three years. Think the economy is
heading for a fall? Buy a basket of credit default swaps. Worried about interest
rates? Someone can be found to sell you a boatload of swaptions.
But who
actually understands any of this stuff? When it comes to their behavior in times
of financial crisis, no one does, really. That is the message that underpins a
recent, extremely thorough and occasionally alarming report from the
unfortunately named Counterparty Risk Management Group II, a collection of
senior risk managers and other officials from Goldman Sachs, JPMorgan Chase,
Citigroup and many of the other institutions that devise and sell complex
investment products to professional and private investors. (The report is
available on the Web: www.crmpolicygroup.org.)
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