No quants need apply: new trends in risk hiring

Dragana Pilipovic is the author of the book Energy Risk, the second edition of which was published in 2014. She is currently working on her PhD in physics at the University of Illinois at Chicago.

A long time ago in markets far, far away, risk managers were focused on internal dangers. Our mission was to guard against rogue traders and others who might do financial damage. If we had been characters in a science fiction movie, we would have been the sentry droids hunting for saboteurs who might breach the spaceship's hull from the inside.

Having survived the supernova known as the global financial crisis of 2008, however, I now feel that the risk function has diverted its focus outward, towards a meteor shower of new regulations. And that has redefined the qualities needed in a risk manager.

Many of those who work on staffing issues in the risk universe seem to agree. The risk manager of 10 years ago was "almost entirely focused on financial risk; how market price changes or credit risk might impact the business", says David Carden, a New York-based director at executive recruitment firm Leathwaite.

Today, such risks "are no longer a priority question", he adds. "As such, strong specialist financial risk or quantitative skills are no longer a prerequisite. Chief risk officers need to be equipped to tackle other threats to their businesses that include liquidity, operational, compliance, IT, regulatory and reputational risks."

The (compliance) force awakens

It's no secret that, within many companies, compliance has gained ground at the expense of the risk management function. With the Dodd-Frank Act in the US and various new regimes coming into force in Europe – including the European Market Infrastructure Regulation (Emir) and the new Markets in Financial Instruments Directive (Mifid II) – trading organisations simply have more rules to worry about.

In my view, there seems to be a growing jealousy among risk managers towards their compliance colleagues, especially since the new regulations have sucked all the oxygen – and budgets – out of the room. It is as if these days even traders are trying to be nice to compliance, while risk managers are getting the traditional brush-offs.

Sid Jacobson, managing director of Pivotal Risk Advisors and a 25-year veteran of the energy derivatives markets, says Dodd-Frank heavily tilted the axis of the risk manager's world. "Risk managers worked overtime to interpret new rules, adapt processes and implement systems to support emerging regulatory compliance programmes, while at the same time facing a corporate world where their seat at the executive table is marginalised," he says.

I worry that all the new regulations have made companies more reluctant to admit wrongdoing on the trading desk. In the ‘old days', losses incurred by a rogue trader would be a blemish at best, or at worst a material loss reported in the company's financial statements, with only a few rare cases resulting in a complete, Barings Bank-style annihilation of the firm. In the new world order though, a report of even minor trader mischief might threaten the company's licence to operate.

Wanted: new and improved Jedi

Because of these trends, risk managers need to juggle new and broader duties. And they don't necessarily involve creating Monte Carlo simulations in Matlab or modelling gamma risk in an electricity options portfolio. Instead, the focus has increasingly shifted to people skills: the ability to collaborate and communicate effectively with traders, executives and compliance officers.

"While the risk function still requires traditional technical skills, the new skill of storytelling is emerging as one of the highly desirable traits," says Alex Zhukovsky, New York-based director of energy portfolio risk management at National Grid, a multinational natural gas and electricity utility.

Others note that the risk manager's traditional toolkit has been undermined by the growing role of unpredictable, difficult-to-model factors in the markets, such as the recent Brexit vote in the UK, which roiled currencies and equities, or government renewable-energy policies, which introduce a weird new logic into energy trading. "The usual risk management indexes are of less value in avoiding problems, because these newly ascendant factors are less amenable to probabilistic quantification," says Steve McAleavy, a managing director at The Austin Group Energy, a Houston-based recruitment firm.

All this makes it more important to hire risk managers who can think on their feet and play well with others. "Adequate technical risk skills have always been a driver in hiring," says Mikhaela McDonald, a London-based managing consultant with Commodity Search Partners, a recruitment firm.

"However, firms are placing more emphasis on individuals who can conduct qualitative as well as quantitative risk assessment. Firms are seeking individuals who have the necessary soft skills to build relationships with key stakeholders, particularly individuals in front office, and apply good judgement in risk situations."

You do not have to be a quant to be a successful risk manager. It used to be that you had to argue why you needed to hire a PhD. Now it seems that many times you have to argue why there is no need for a PhD Spyros Maragos, Direct Energy

Spyros Maragos made a similar point during a panel discussion at Energy Risk Summit USA in Houston on May 18. "Quant skills, although important, are not paramount," said Maragos, a Houston-based manager of risk analytics at Direct Energy, a US power and gas retailer. "You do not have to be a quant to be a successful risk manager. It used to be that you had to argue why you needed to hire a PhD. Now it seems that many times you have to argue why there is no need for a PhD."

He added that "you have to ask the right questions. That is a trait of good risk managers. You need to be able to explain the numbers to management and have an understanding as to what impact changes in energy commodity markets have on the company P&L".

Another crucial need is the ability to explain things to compliance. In the current environment, says one industry veteran, there is an increased demand for cooperation between risk managers and compliance officers. "We have a compliance lawyer for a reason," he says. "The risk manager has a better understanding of the business, so we make a pair together."

None of that means companies should sack their risk management teams and start hiring communications majors with zero maths and programming skills. In fact, junior risk analysts might be expected to be even more technically specialised than ever.

Recruiters say the breadth of abilities is key. "I have found that the need for just plain market risk analysts isn't really there – someone who just can look at reports and identify red flags," says Patricia McNulty, founder and chief executive of the Energy Exchange Group. Instead, companies now "really want someone who can do that, but who also has the strong quant and programming skills wrapped up into one person", she adds.

Perhaps risk managers face the same challenge as the Jedi in Star Wars. Their ways seemed quaint and outdated to some observers, such as Han Solo, who derided their "hokey religions and ancient weapons". Yet only they could offer the Force needed to maintain harmony in the universe.

A new hope?

So should we be optimistic about the future of the profession? On the one hand, the tyrannical reign of compliance and endless regulatory reporting projects have increased the demands on risk managers at a time when low commodity prices have constrained budgets. That means risk managers must do more with less.

"In a rapidly expanding universe of governance, compliance, controls and multiple audits, nobody expects traditional risk reporting on market, credit and liquidity risks to be dropped," says National Grid's Zhukovsky. "As a result, the pressure is up for those risk groups [while their] headcount remains the same or shrinks."

But, by the same token, that means the risk function is more critical than ever, across both energy and financial services firms. "The good news for young talents is an emerging generation gap," Zhukovsky says. "Risk should be an attractive placement option for recent graduates."

Jim Allison, the former risk manager for North American gas and power at ConocoPhillips, fears risk will continue losing out to compliance as long as markets stay quiet. And when the inevitable occurs – such as a spasm of volatility or an Enron-style bankruptcy that sends shockwaves through the markets – the industry may come to regret its years of underinvestment in risk management.

"We've gone a while without a market or credit risk event," Allison observes. "But something is going to happen. We are setting the stage for the next boom. And when something happens, I am afraid that we have pulled resources away so that we will be unable to understand what is happening or respond to it when it happens."

With luck, traditional risk skills will remain relevant and help us either prevent or recover from such a disaster. To paraphrase Princess Leia, in our most desperate hour, good risk management is our only hope.