Risk

Two thirds of investors say risk management is very important when selecting fund manager

The focus on risk management and mitigation has increased exponentially since the beginning of the financial crisis and continues to grow with more than two thirds (69 per cent) of investing institutions viewing risk management as very important in the fund manager selection process and 47 per cent as essential in the design and implementation of portfolio investment strategy.

 
This is according to bfinance’s inaugural Risk Management Survey. bfinance, already well known for its semi-annual Institutional Investor Allocation survey, polled institutional investors with a combined USD480bn AUM for its latest research. Participating firms were located in Europe, the US and Middle East.
 
The quest for diversification is set to dominate risk management strategies in 2013. Significant emphasis is expected to be placed on tail risk measures and maximum loss.
 
Sixty five per cent of institutional investors are using unsophisticated systems to monitor risk leading to a significant under estimate of risk at portfolio level.
 
The resources allocated to risk management are not keeping pace with the need for heightened risk monitoring. Assuming a threshold cost of USD250,000 for a sophisticated risk system, 72 per cent of respondents have not invested sufficiently.
 
Asset price collapse, volatility and contagion are seen as the most likely headline investment risks over the next 12 months.
 
More than 90 per cent of investors said they wished to preserve the independence of risk monitoring and risk management from the investment function within their organisations.
 
The increasing interest of investors in real assets and absolute return strategies is raising additional challenges for pension fund risk departments.
 
Toby Goodworth, head of the risk management at bfinance in London, says: “The collapse of Lehman Brothers and continued market uncertainty resulting from the European sovereign debt crisis has drawn attention and scrutiny to the discipline of risk management. Faced with unexpected tail losses, high cross-asset correlations and illiquidity, investors have continued to rely more heavily on risk management, and the corresponding development of risk systems and processes. Our new survey underpins this trend and arguably proves that the focus on risk management at all levels of the investment process is greater than ever before.”

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