Companion files

Financial Risk Management

A Practitioner’s Guide to Measuring What Actually Breaks a Fund

Julian R. Sterling

These are the four Excel workbooks that go with the book. Every figure the book prints is reproduced in them by a live formula rather than a typed constant — change a volatility, a correlation, a spread shock or an impact coefficient and every dependent number moves. Each one ends with a Checks sheet setting the printed figure beside the computed one: 65 controls in all, every one green. If a control ever reads FAIL, the workbook is wrong, not the book.

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The four workbooks

• Chapters 4, 9, 12, 13 and 14

  Halverton — the four numbers, and the fifth

  The four numbers the book opens with, computed on one set of inputs so the gaps between them move when you change an assumption rather than staying where the book left them. A one-day value at risk of 7,242,456, which is 0.862 per cent of net assets. A stress loss of 93,277,800, which is 11.10 per cent. A cost of getting out of 5,101,785 or 2,016,532, depending on a decision nobody has written down. And a transfer of 0.8098 per unit to the investors who stay.

  Then the fifth number, which is not denominated in money and therefore appears in no risk report: what the fund can still sell inside a week. It reads 31.2 per cent before the redemption and 8.3 per cent after the cheap way of meeting it. The impact coefficients sit on the Inputs sheet with a switch that halves, doubles and triples them — being wrong by a factor of three moves the answer 44 per cent, and the choice of selling policy moves it 153. The parameter is the one everybody argues about, because it is the one with a formula.

  The_Four_Numbers.xlsx · XLSX · 19 KB

• Chapters 4, 6 and 7

  Value at risk, expected shortfall and the backtest

  The parametric construction worked to 7,242,456 one visible step at a time: sleeve volatilities, the correlation grid, the quadratic form, the daily scaling and the confidence multiplier, each on its own row. Expected shortfall sits beside it. The correlation matrix has a switch between the reported values and the crisis values, and the diversification benefit — 0.767 of a point of volatility, 11.5 per cent — falls to 27.6 per cent of itself when you throw it.

  The horizon block scales one day to twenty by the square root of time, to 32,389,246, and puts beside it the objection of Chapter 7: the scaling assumes you can trade, and the book that produced this number takes eleven days on average to sell. The last sheet is the exception counter, with the green, amber and red zones drawn at their conventional thresholds, so a year of breaches can be typed in and read rather than argued about.

  VaR_ES_and_the_Backtest.xlsx · XLSX · 11 KB

• Chapters 9 and 16

  The stress book, and the reverse

  Spread duration by sleeve against a shock you set in basis points. On the book’s calibration — 120, 450, 300 and 600 — the four sleeves lose 18,748,800, 50,274,000, 1,575,000 and 22,680,000, a total of 93,277,800, and the net asset value per unit falls from 100.00 to 88.8955. On your calibration it totals to whatever your calibration says.

  The scenario does not stop at the mark-to-market, which is the argument of the chapter. The financing sheet carries the repo, the haircut moving from 5 to 15 per cent, and the collateral call of 14,860,681 that arrives on the same morning as the redemption and competes with it for the same cash. And the reverse stress runs the engine backwards: rather than asking what a scenario costs, it solves for the redemption the fund could not have met.

  The_Stress_Book.xlsx · XLSX · 9 KB

• Chapters 12, 13, 14 and 15

  Liquidity and the redemption

  The liquidation engine, position by position, with the half-spread and the market impact priced separately and the impact rising with the fraction of the sleeve you sell. The two selling policies run side by side on the same redemption: the vertical slice costs 5,101,785 and leaves one-week liquidity untouched at 31.2 per cent; liquid-first costs 2,016,532 and leaves 8.3 per cent.

  Six successive rounds are laid out beneath, with the cumulative cost of each policy and the liquidity remaining after each. The cheap policy stays cheap throughout — 4,753,970 against 8,292,048 over the six — and that is the finding the book had to be rewritten around: there is no crossover. The expensive policy never catches up in money, because what the cheap one spends is not money. The last sheets carry the queue, the first-mover advantage of 0.0804 per unit, and the swing factor each policy implies — 2.733 per cent against 1.080 — which is the same choice seen from the board paper.

  Liquidity_and_the_Redemption.xlsx · XLSX · 18 KB

Conventions used throughout

Blue text	a hardcoded input — you may edit these
Yellow fill	an input cell; everything else on the sheet is a formula
Black text	a formula — do not overtype these
Checks sheet	the printed figure beside the computed one, with a PASS or a FAIL

Why the checks matter more than the models

A workbook that agrees with a book proves nothing on its own — the author wrote both. What the Checks sheets do is different: they force the model to reproduce a number that was printed before the model existed, from a formula rather than from the number itself.

On this book the exercise did more than catch arithmetic. The six-round engine of workbook 4 was built to locate the point at which the cheap selling policy becomes the expensive one — the crossover the manuscript had asserted. There is no crossover. The chapter was rewritten around what the model actually says, which is a harder and more useful claim: the cheap policy is cheaper in every round, and what it spends instead is the fund’s ability to meet the next redemption at all.

Where a printed figure depends on a convention rather than on arithmetic — the confidence multiplier at 99 per cent, the trading-day count, the assumed severity in the stress — the workbook shows the convention as an input rather than burying it in a formula.

Opening the files

The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They use no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to update links on opening, decline — there are none.

Articles on this book

• How much of a credit fund's diversification benefit survives a crisis?A four-sleeve credit fund's diversification is worth 0.767 of a point; only 27.6 per cent of it survives a crisis.
• Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.

Also by Julian R. Sterling

The other books with companion files. The full list of titles is on the author page.

• Breaking Into European Defence ProcurementThe money and the instruments, the 35 per cent content test, and proposal economics.
• Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
• CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
• How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
• How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
• How to Read a Limited Partnership AgreementWhat the clawback actually collateralises, and why every dollar won on the tax clause lands in the uncollateralised column.
• How to Read a Private Funds Financial StatementsThe Harbourgate reporting pack, five worked cases, and rebuilding your own account.
• How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
• Insurance Capital for Asset ManagersWhy the same fund costs two insurers different amounts, and what opacity costs a manager in euros.
• Logistics and Industrial Real EstateNet effective rent, the ageing asset, and the development letting decision.
• Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
• Operational Due Diligence in Private EquityThe rating model built and then broken, and why refining a rubric weakens it.
• Personal Finance for BeginnersWhat a minimum payment really does, and what the snowball and the emergency fund actually cost.
• Private Equity Investor RelationsWhat a fund has returned, read six ways — and the eleven-point gap between them.
• Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
• Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
• Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
• Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
• Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
• Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
• Real Estate Joint VenturesThe JV waterfall and promote, the complete venture, and failure to fund.
• Real Estate Transaction Due DiligenceWhat the diligence cost, which workstreams paid for themselves, and the investigation the book skips, priced.
• REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
• Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
• Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
• Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
• Senior Living and Healthcare Real EstateThe resident engine of a seventy-bed home, the payor mix, and a rota costed at the employer's real hourly rate.
• Significant Risk TransferThe bank's ceiling and the investor's floor derived independently, and the narrow band of prices at which both can say yes.
• Stock Market Investing for BeginnersWhat compounding and fees actually cost, with figures — and a calculator for your own.
• Student Housing Real EstateRevenue per available bed against the rate card, the letting campaign week by week, and the cost base of a 520-bed scheme.
• The AIFMD II HandbookThe reverse stress test computed, and the facility term that moves it more than any asset.
• The Asset-Based Finance HandbookThe borrowing base off a live loan tape, the Meridian transaction, and trigger design.
• The CBAM Compliance HandbookWhat 2027 really costs, how big the buffer should be, and the term the surrender formula counts twice.
• The Co-Investment PractitionerWhat dilution really costs, what a pay-to-play clause is worth, and how much to hold back.
• The Continuation Fund HandbookThe Thalia transaction, the bid funnel, and the fees behind the roll decision.
• The Data Center Development HandbookThe underwrite computed: the levered return the chapter never builds, and what a twelve-month slip costs.
• The Distressed Debt InvestorWhere the fulcrum security actually breaks, and what an 80-cent recovery is worth once composition and time are priced.
• The ESG Manager in Private EquityThe exit in equity and IRR, the line the book drops, and the half-turn nobody controls.
• The EU AML HandbookThe back book sized, and the month beyond which no headcount recovers a one-year window.
• The Evergreen Fund HandbookWhat the sleeve costs, and the headline IRR at which a closed-ended fund merely ties.
• The Family Office ProfessionalWhat an office costs, and the level of wealth at which building one starts to pay.
• The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
• The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
• The Infrastructure Investment AnalystDebt sculpted to a coverage floor, and one asset valued twice to the last decimal.
• The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
• The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
• The Private Equity Operating PartnerThe value creation bridge built in full, and who actually made the return.
• The Private Fund Compliance OfficerThe grey zone as basis points, a broken deal four ways, and how many items you must test.
• The Private Markets Limited PartnerWhat a co-investment programme really saves, and the loss rate that erases it.
• The Private Markets Valuation SpecialistThe book describes its illustrations without numbers on purpose. These files close the chain, with every step visible.
• The Private Wealth FundraiserThree peaks, years apart, and the signature that tells a forecast miss apart.
• The Real Estate Asset ManagerBusiness plans, leasing, and what deferring the work on a building actually costs.
• The Real Estate Debt InvestorThe margin against the return on capital, the floor priced, and what prepayment protection buys.
• The Real Estate Development ManagerThe residual appraisal, the worked scheme, land diligence and the risk register.
• The Real Estate Secondaries InvestorAn eighteen per cent discount to net asset value that is really 9.18 once the reported value is unsmoothed.
• The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
• Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
• Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
• Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
• Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
• Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
• Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
• Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
• Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
• Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
• DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
• Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
• Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
• Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
• The Private Equity Secondaries InvestorThe seller’s floor beside the buyer’s ceiling — and the zone that usually is not there.
• Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.

These files accompany Financial Risk Management. The book is on Amazon.

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