Study highlights value of risk management
More than 80% of institutional investors expect risk management to play a greater role in the investment decision process in the future, according to a new study published by BNY Mellon in collaboration with Nobel Prize-winning economist Dr Harry Markowitz.
Over the next five years, almost three quarters of institutional investors expect to spend more time on investment risk issues, while 68% expect to spend more time on operational risk issues. However, only one in four of respondents had a chief risk officer.
Entitled ‘New Frontiers of Risk: Revisiting the 360° Manager’, the study looks at a broad array of risk-related topics and issues, including market risk; investment risk measures; performance vs. liabilities; credit risk management; emerging markets and non-domestic investing; alternative investments; asset allocation; diversification vs. returns; liability-driven investing; operational risk management controls; operational risk insurance; liquidity risk; political risk; regulatory change; and best practices.
Dr Markowitz said, “The crisis of 2008 was different. So was the crisis that started in March 2000 with the bursting of the tech bubble. So will be the next crisis. The moral is that one will never be able to put the portfolio selection process on automatic. The trusted quant team needs to constantly evaluate the current situation.
It should also make sure that higher management understands what assumptions are being made, how and by whom any exotic asset classes being used have been evaluated and what the vulnerabilities are of the general approach that is being taken. Furthermore, the push to integrate risk-control at the enterprise level, rather than at the individual portfolio level, should be continued.”
Key findings of the study, which surveyed more than 100 institutional investors (including pension funds and endowments & foundations) with approximately $1trn in aggregate AuM include:
• No more chasing alpha - it is down with alpha and up with targeted returns
• Increased use of alternatives - survey respondents have expanded their use of alternative investments to improve diversification and potentially help with downside risk
• A re-awakening of risk awareness
• Analytical tools on the front lines of risk management - analytical tools based upon risk-return analysis and performance attribution continue to be the most commonly used to model, analyse and monitor investments
• Avoidance of unintended bets - a desire to avoid unintended leverage and to better understand underlying investments has grown markedly since the 2008 financial crisis and appears to be driving institutional investors toward solutions offering greater investment transparency
Over the next five years, almost three quarters of institutional investors expect to spend more time on investment risk issues, while 68% expect to spend more time on operational risk issues. However, only one in four of respondents had a chief risk officer.
Entitled ‘New Frontiers of Risk: Revisiting the 360° Manager’, the study looks at a broad array of risk-related topics and issues, including market risk; investment risk measures; performance vs. liabilities; credit risk management; emerging markets and non-domestic investing; alternative investments; asset allocation; diversification vs. returns; liability-driven investing; operational risk management controls; operational risk insurance; liquidity risk; political risk; regulatory change; and best practices.
Dr Markowitz said, “The crisis of 2008 was different. So was the crisis that started in March 2000 with the bursting of the tech bubble. So will be the next crisis. The moral is that one will never be able to put the portfolio selection process on automatic. The trusted quant team needs to constantly evaluate the current situation.
It should also make sure that higher management understands what assumptions are being made, how and by whom any exotic asset classes being used have been evaluated and what the vulnerabilities are of the general approach that is being taken. Furthermore, the push to integrate risk-control at the enterprise level, rather than at the individual portfolio level, should be continued.”
Key findings of the study, which surveyed more than 100 institutional investors (including pension funds and endowments & foundations) with approximately $1trn in aggregate AuM include:
• No more chasing alpha - it is down with alpha and up with targeted returns
• Increased use of alternatives - survey respondents have expanded their use of alternative investments to improve diversification and potentially help with downside risk
• A re-awakening of risk awareness
• Analytical tools on the front lines of risk management - analytical tools based upon risk-return analysis and performance attribution continue to be the most commonly used to model, analyse and monitor investments
• Avoidance of unintended bets - a desire to avoid unintended leverage and to better understand underlying investments has grown markedly since the 2008 financial crisis and appears to be driving institutional investors toward solutions offering greater investment transparency
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