In our PRMIA risk survey we found that if risk managers could change one thing relating to risk management, they would create a risk culture and find a better way of integrating risk into their investment process. In my view, these the two things will have
the most positive impact on risk management overall. Yet at the majority of buy-side firms (approx. 70%) risk and investment decision making are completely separate functions.
While buy-side firms now recognize the importance of developing an integrated approach to risk management, surprisingly only 42% of firms we surveyed currently use a risk dashboard showing all the risk exposures. What does that mean? A lot more progress
still needs to be made to empower risk managers to become, if not integrated, at the very least involved in the investment decision making process.
If risk management is to move beyond box ticking, the function will require KPIs that measure how it contributes to investment performance. A CIO of a large insurance firm in China who we surveyed reinforces this: “Our risk managers are diligent but they
are not qualified investment professionals; they only know the risk management techniques but not the logic behind investments. I would say the best measure of success of a risk manager is that s/he is ready to be reassigned to the investment team and can
pick up everything in a reasonably short time.”
A CRO of a London-based boutique asset manager summed up that risk management has three key performance indicators:
- No blow ups
- Good relationship with the front office, finance and the board
- No issues with the regulators
Sounds simple, but achieving this succinct assessment is one of the most important positive changes that buy-side firms could make to improve their risk management. Why? One of New-Zealand-based participant points out: “Risk management is integral to the
generation of returns from risk assets.”