Safe Harbor Bank
Wachovia Bank
Bloomberg L.P.
A macroeconomic hedge fund
GMAC Real Estate International Properties Group
Risk Capital Management Partners
Deutsche Bank
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A Sample of Client Projects:
Real Estate Investment Trust
Goff Capital performed a real option valuation and risk-return analysis on a structured real-estate deal. Non-U.S. investors pool funds with a preferred equity member into an offshore trust for the purpose of participating in the U.S. real estate market. The trust funds provide capital for a U.S. holding company to invest in the conversion of an obsolete structure into a medical arts building in a major metropolitan area. Goff Capital analyzed the structure for all parties involved. A waterfall payout structure provides a tranched CMO-like (collateralized mortgage obligation) security exposed to market and development risk. The size of the return depends on the success of the conversion, while its division is tied to a real estate investment (REIT) index. Once the Goff Capital analytics were in place, suitable prices, returns, and risks were calculated and the deal's structure was tuned to balance the risk-return for all parties involved.
Ex-Ante Risk Management
A portfolio manager hires several traders who will trade different asset classes, e.g., fixed income, equity, commodities. Because of the partially uncorrelated nature of the asset classes, there will be diversification of market risk in the portfolio. The question arises, how should risk capital be allocated among the traders to maximize the benefit of diversification?
This question, posed to Goff Capital by a start-up macroeconomic hedge fund, squarely flips traditional ex-post risk analysis (retrospective, historical measures used for risk reporting) on its head. What is needed is ex-ante risk measures (use of incomplete information) to drive the business model. The answer must account for uncertainty and unknowns: trades can be long or short and returns are generated through knowledge of the macroeconomic trends rather than through the traditional concept of buying and holding assets with expected returns. Constrained optimization problems, of which these problems necessarily are, depend critically on input assumptions, constraints, and the objective function (the fund's goal). Goff Capital's answer presented to the hedge fund was a concrete model for capital allocation, via trading limits, that depends dynamically on market conditions, the portfolio composition and the portfolio managers' views.
In addition, Goff Capital was retained to provide support and documentation for internal risk management and controls (VaR, limits, tail and gap risk) and the preparation of the private placement memorandum. Final delivery included a model for measurement and calculation of risks and three documents. After the initial engagement, Goff Capital was retained for ongoing services on an as-needed basis. The hedge fund began trading in 2004.
Market Risk in Life Insurance Products
A team of experienced individuals in the insurance industry sought to start-up an offshore life reinsurance company. Life insurance products provide financial benefits to the consumer and contain market risk which passes to the reinsurance company. As one example, rollup guarantees are put options with rising strike prices. A second example is a Guaranteed Minimum Death Benefit (GMDB) which pays the highest account value on past anniversary dates and contains potentially significant market risk. This is a standard variant of a lookback option. The insurance company's market exposure is ultimately a basket of multiple options on baskets of mutual funds. These options, coupled with lapse and mortality risk, provide a risk-manager's worst nightmare and best dream rolled into one. The measurement and management of these risks, and the delicate balancing of premium inflows and claim outflows through judicious use of hedging, determine the success of the business.
The start-up team approached Dr. Goff, who had prior experience with these insurance products, to supplement risk calculations specific to their effort. A thorough calculation of the risks and sensitivities (Greeks) requires significant time, data, and technology, not immediately available in a start-up situation and, even with such resources, is unwieldy. Goff Capital provided selective analysis capturing primary risk factors to enable the team to comfortably work with realistic values for their business plan. The analysis entailed multiple hedging strategies, calculations of (probabilistic) worst case scenarios, estimates of economic and regulatory capital, and working cash flow. The team is seeking its lead funding.
Fund-of-Funds Portfolio Structuring
A small start-up fund of local funds in an emerging market chose Goff Capital to help structure its portfolio and risk management. The fund seeks to provide US investors an opportunity to invest in a politically and economically favorable market that is generally difficult for US investors to access, and a market that has low correlation with other major equity markets. Initial work by Goff Capital showed that, based on historical measures, local managed funds have been able to outperform the national index and that a fund of these funds would provide less volatility and better risk-adjusted return. Goff Capital helped determine a selection and weighting algorithm based upon both quantitative (performance, correlation, etc.) and qualitative (fund managers experience, style, etc.) measures. The final algorithm determining portfolio component weightings was a variant of an existing model used by several major institutions. Goff Capital also provided advice on hedging foreign-currency risk and wrote risk-documentation for the PPM. The fund is presently seeking capital.
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