Risk management is quickly evolving, according to a survey carried out by The Bank of New York (BoNY). The firm has just unveiled a risk management study, which stresses the dawning of a new risk management frontier for institutional investors.

BoNY concludes that institutional investors (mainly pensions funds) are now placing operational risk and political risk on a greater footing relative to market risk when evaluating their overall risk management platform. The firm drew its conclusions after surveying 76 institutional investors in association with Wilshire Associates, ING and Harry Markowitz (the recipient of the 1990 Nobel Prize in economics).

Some 70% of the surveyed fuds were US-based, while 24% came from Europe including Great Britain. The Asia and Middle East component accounted for 6% of the sample. The size of the surveyed institutions were evenly split between those with less than $1 billion in assets, those between $1 billion and $5 billion in assets and investors with over $5 billion in assets.

Although the Asian component of the "New Frontiers of Risk" survey was understandably small, the views of regional institutional investors are consistent with their global peers. According to BoNY, the main difference in risk management attitudes between US institutional investors and their Asian counterparts is a greater reliance on written and tested data recovery plans.

Given the backdrop of a potential avian flu pandemic, 100% of Asian investors surveyed stressed the importance of a disaster recovery plan when investing funds and planning for operational risk. Of the US sample, only 75% of respondents believed that disaster risk was an important component, although BoNY expects this percentage to increase in time.

"Across the board, risk management concerns did not vary significantly, with similar concerns surfacing in all markets," says Debra Baker, a New York-based managing director of custody services. "Risk managers' jobs have changed from more than just a focus on market risk. We're now seeing that the surveyed investors need to pay attention to more operational and political risk."

This is not to say that emphasis on market risk, defined as the exposure to variation in asset returns or values that results from changes in systematic risk factors, has diminished at all. Some 91% of participants in the survey rate market risk as most important element in their investment decision process.

In assessing the relative value importance of the various market risks, respondents rated asset allocation as the most critical component. Other highly rated market risk concerns offered by participants include contributions, benchmarks, interest rate movements and liabilities.

Within the market risk section of the survey, BoNY has also discovered that with improving analytical technology and the desire for increased diversification by many investors, participants are looking more to alternative investments. Many respondents indicate a recently enacted asset platform including greater exposure to real estate, private equity, commodities, derivatives and hedge funds.

In particular, use of hedge funds is seen as an ever-increasing tool used by the surveyed organizations to enhance yield and cover liabilities. According to collected statistics, over 30% of respondents are currently investing in hedge funds, with the number anticipated to expand to 45% over the next five years.

Although only 6% of respondents stated that operational risk is their primary risk management concern, attention to this component of investment is increasing. The same bodes for political risk, with 3% believing that losses stemming from exposure to governmental processes and events are their primary risk management apprehension.

Regardless of the low level importance placed on these risk metrics, the research does point out that plan sponsors currently spend 40% of their time on operational and political risks.

On the operational side, headline and service-level risks are the participants top concerns, while legal/regulatory changes are by far and away the greatest political risk concern.

"With more sophisticated clients and more assets in the market, the risk return paradigm has changed," says Baker. "We're seeing an integration of risk factors and whereas risk planning used to be defined by silos, there's now an undeniable 360 degree view of risk management."

Forged in September 2004, the strategic alliance between The Bank of New York and Wilshire Associates was motivated by a shared desire to meet the increasingly sophisticated risk management demands of institutional investors. Combined, both firms provide global risk services to more than 600 institutional investors clients that manage approximately $14 trillion in assets.

For this survey, Nobel Prize winner Markowitz, the economist who introduced the notion of risk management, collaborated extensively with both BoNY and Wilshire, as did ING, which provided insight into political risks.