Name: Masao Matsuda, PhD, FRM, CAIA

City: New York

Current Job: President and CEO, Crossgates Investment Management Company

GARP Individual Member Since: 2010

Masao Matsuda: PIMCO is a good example of the types of partnerships I helped build for Nikko. In the mid 1990s, PIMCO was not yet a big player in Japan, but as this partnership developed, PIMCO was able to more than double its assets in Japan. Initially, PIMCO was reluctant to forge a partnership with Nikko because it had a distribution arrangement with Nikko's rival. After my visiting PIMCO's CEO several times, the company finally agreed to launch funds through Nikko. I believe that the most difficult part of coordinating the partnership development was filling cultural gaps between the two companies. As a bilingual/cultural individual, I believe I was able to communicate with the senior management of PIMCO in a way that helped bridge these gaps.

With regard to developing new models, one of my first responsibilities at Nikko was working with Professor William Sharpe to help build the Nikko-Sharpe Asset Allocation Model for Japanese markets. Along with the completed model, we developed a series of market indices that are published by Nikko and utilized by market participants in Japan. Later on, Professor Sharpe won the Nobel Prize in Economics and, over the years, it was my pleasure to manage this important relationship.

Following the success of the Nikko-Sharpe Model, Nikko assigned me to build a global version of the model. This phase of model building required skills in quantitative areas, as well as high-level communication skills involving intellectual property issues and attorneys who represented opposing interests. For this venture, we developed a model jointly with Professor Ken Froot of Harvard Business School.

Ironically, the global asset allocation model we developed was way ahead of industry practice in Japan at that time, and none of the Nikko group entities could make direct use of it. Interestingly, however, Nikko Asset Management recognized its usefulness five years after the model was completed and started using it for institutional business.

Pursuing one career path means foregoing some opportunities that matter to you. In my case, I was able to work very closely with many well-known academics in the U.S., but did not have much opportunity to publish, outside of a few articles in Nikko's in-house journal. In retrospect, I feel I would have benefited substantially from publishing articles in well-respected journals, as they help establish one's reputation in a global marketplace.

Yes. I believe it can be valuable to have mentors within your organization, as well as outside. My initial responsibilities at Nikko involved dealing with well-known academic people such as Professor Sharpe. In a way, he was my mentor. He guided my research activities and helped establish relationships with influential academics in finance, as well as practitioners in investment management. Interestingly, a part of the foundation for my current business activities comes from the relationships that have an origin at the beginning of my career.

Another mentor of mine eventually became CEO of the entire Nikko Group. His influence was especially impactful in 1999, when I was appointed CEO of Nikko Securities International (NSI), and Chairman of Nikko Americas Holding. Prior to 1999, NSI's main business consisted of broker/dealer activities, investment banking, and primary dealership of U.S. Treasuries. A joint venture with Salomon Smith Barney (SSB) that culminated in the late 1990s had changed the landscape so that it no longer made sense for Nikko to compete directly with SSB in the U.S. and Europe, where SSB had a much bigger presence. The Board had decided to shut down NSI, and I needed to reverse that decision. I recognized that New York was the global hub of hedge fund activities and proposed that, instead of shutting down the company, NSI be transformed from a broker/dealer to an investment management company specializing in hedge fund business. I could not have accomplished the reversal of their decision without the very influential support of my mentor, who counseled the Board on the advisability of this transformation. As a result of this strategic shift, NSI became a highly profitable company and, in 2003, generated a net profit in excess of $29 million with only about 35 employees. In that fiscal year, NSI contributed a substantial portion of Nikko group's overall profits.

I consider financial risk management to include a variety of professions, not just those who are CROs or in risk management departments. For instance, I believe that the investment management business is turning into the investment risk management business. Let me illustrate why.

First, predicting the future volatility of assets or asset classes can be more useful than predicting their future returns. In the area of asset allocation in which I specialize, the entire industry is moving toward greater emphasis on improving risk estimates. In particular, in dealing with hedge fund allocation, they typically do not rely on the estimates of expected returns for allocation among funds or strategies. Instead, they focus on the expected volatility levels of these funds or strategies.

Second, the basic framework for the Modern Portfolio Theory was developed about a half a century ago, and MPT assumes that security returns are normally distributed. However, many surprises in the form of investment disasters came out of left field when people ignored the fact that security returns often have fat left tails and their distributions' skewness and kurtosis are out of normal ranges. As a result, extreme losses tend to happen more frequently than implied by normal distribution. Therefore, studying theories such as Extreme Value Theory, which is a part of the FRM program, is helpful in understanding the characteristics of these tails.

Those examples demonstrate how critical it is to have a solid understanding of financial risk management for people involved in investment management. Generally speaking, risk management is something that helps create economic value. Organizations with strong risk management discipline should be able to survive adversities and exploit opportunities that arise during turbulent times. In this sense, senior executives in any field should strive to be competent risk professionals.

For senior executives, it may not be important to be able to calculate "credit spread" or "probability of default." However, understanding key risk management concepts, as well as the strengths and weaknesses of a risk management system in place, is critical in properly managing risk. At the time of a crisis, a senior executive's ability to communicate effectively with risk professionals will enhance corporate decision-making. To go one step further, in my opinion, the ability to manage risk and risk professionals is an essential qualification for future C-suite professionals.

For people who do not have a strong background in fields such as financial engineering, mathematics or physics, some material that requires relatively complex calculation may seem overwhelming. However, you are only expected to understand formulas and apply them. You are not expected to derive the Black-Scholes-Merton equation for option pricing in the exam.

By contrast, for those who are more mathematically inclined, the amount of readings that relate to the Basel Accord may appear too large. If you read the FRM Examination AIM statements and study relevant portions of the materials, however, you can process key information effectively.

At the beginning, I was not confident that I could pass Part I, let alone Part II. By dedicating a substantial amount of time to assigned readings and working on past and practice problems, however, I started to feel confident that I had a fighting chance.

Chapter meetings and webcasts have been useful to broaden my knowledge. Becoming a member of the Subject Matter Experts panel gave me a chance to meet with other very competent risk professionals. In general, if you try to be an active member, I believe the membership becomes highly valuable to you.

Prior to assuming the role of CIO/Global Head for Multi-Asset Investments for Nikko Asset Management, I acted as CEO of Nikko group's U.S. operation for nearly eight years. In terms of decision-making and execution, I was already accustomed to being a final decision-maker. An obvious difference between now and then is my need to have a very tight cost control. I also need to rely on my credibility rather than Nikko's name in developing new business. However, I found that my former colleagues, both in Japan and in the U.S., have been very supportive of my activities.

You have to be flexible and adjust your business model to the external environments. The financial crisis delayed pursuing my original business plan, and I started consulting activities to buy some time. However, these consulting activities now constitute my core activities and are likely to lead to an opportunity to pursue my original business plan.

Risk management goes well beyond assessing credit risk of clients, borrowers, and/or counter-parties, and managing market risk. It encompasses dealing with operational risk and addressing enterprise risk management. It affects organizations in myriad ways.

Moreover, students need to be made aware that they are likely to encounter risk management issues head-on in their career, whether they are prepared or not. It may be obvious -- but worthwhile -- to point out that having a basic understanding of a risk management framework will prepare them well to recognize and address risk management issues.

Risk management is a means of value creation. A company with solid risk management practices will be in a better position than its competitors to exploit opportunities during the turbulent times. It is important for risk professionals to understand this point, as value creation is the common thread that ties risk professionals to senior decision-makers.