Risk. Every investment manager knows about it, some chased it while pursuing alpha and others avoided it. Now everyone fears it.
"It cannot be 'business as usual' for risk management going forward," says Ingo Walter, director of the SimCorp-funded research unit SimCorp StrategyLab, in a recent survey. "In many ways it will be 'back to the drawing board'."
Whether SimCorp is highlighting the risk-management failings among investors in order to sell its products or for more philanthropic motives is unclear. Nonetheless, the survey results are so strong, it is clear that investment groups have yet to come to terms with risk management.
The current crisis has pushed the issue of risk to the forefront. When the markets collapsed last fall, investment managers realised that their boom-time risk management strategies did not work in the current volatile environment; the realisation has prompted a strong increase in risk mitigation product interest among asset managers and custodians alike.
In the survey titled Global Investment Management Risk Survey 2009, 75% of respondents felt risk management made a minimal contribution to capital allocation decisions at their respective investment management firms, and two-thirds considered the current approaches to risk management to be "inadequate". Obviously something needs to change.
The survey was conducted jointly by SimCorp StrategyLab and Nielsen, who interviewed 90 managerial or executive level representatives from as many investment management institutions.
Nick Quin, SimCorp Asia director of sales and marketing, says the research is meant to support identifying risks, enabling growth and reducing costs. "They are the core to what is really important to an investment manager," he says.
While only around one-third of respondents identify risk methods, strategic understanding or training and competencies as significant causes of the current economic crisis; 70% believe the crisis will result in increased investment in risk management functions.
The main drive of the survey is that risk management has not been an active part of senior management's investment decisions. "Risk control should be given equal importance to revenue generation at the senior levels of management," says Walter. "This has often not been the case in the past."
According to the survey, 62% of respondents feel executive level involvement is integral to managing risk in the future.
"The crisis right now is creating a once in a lifetime opportunity to overcome the issues, recalibrate the risk management function and integrate it into the senior management process," says Quin. How investment management companies accomplish this recalibration is up to them.
"The new risk management parameters will either be set by the organisations themselves and the boards of these companies or by the regulators," says Quin. "Someone's going to do it [and] it's better to come up with those parameters yourself."
The survey predicts that staffing levels, competencies and the implementation of new risk management models and methods are the most likely to receive increased investments. Just how investment managers decide to increase their weighting of risk in their asset allocation strategies might differ, but one thing is clear, executives at those firms need to look at risk just as much as they seek alpha.
"If I was an investment manager, I would be looking to start almost with a blank canvas," says Quin. "I'd get the best brains in the organisation together and think very strategically, trying to set objectives for risk management at the highest level."