LatinFinance - January/February 2015 - 8

BNY MELLON

An Inside Look into Institutional
Investment Risk Management
The growing importance of risk management for
institutional investors remains a key conversation in
ﬁnancial markets around the world. Not differently in
Latin America, with more regulated markets than ever,
where companies follow high standards of industry
practices, properly assessing risk is actually one of
the biggest risks faced by investors, and needs to be
supported by deep knowledge of the market and
strong quantitative techniques.

head of BNY Mellon's Global Risk Solutions group. "For
many, risk management has been a puzzling proposition
- just when they think most risks have been measured,
managed and mitigated, new ones emerge and old ones
evolve. We see the need for a collective risk management
framework that incorporates all areas of risks, their impact
on each other, and one's overall investment program.
Using some form of quantitative scoring across major risk
categories may be the next frontier of risk management."

In a study entitled New Frontiers of Risk: Revisiting
the 360° Manager1, published by BNY Mellon in collaboration
with Nobel Prize-winning economist Dr. Harry Markowitz,
over 100 institutional investors from different parts of
the world were surveyed, including pension funds and
endowment & foundations, with approximately $1 trillion
in aggregate assets under management.

According to Adriano Koelle, Chairman for Latin America
and Country Executive for Brazil at BNY Mellon, "the global
ﬁnancial system is basically a machine to allocate capital.
When they fail to measure risk and thus fail to allocate
capital efﬁciently, the whole industry suffers as we could
see in the recent crisis in 2008".

Among the many interesting ﬁndings revealed, we see that
over 80% of institutional investors expect risk management
to play an even greater role in the investment decision
process in the future. In addition, over the next ﬁve years
73% expect to spend more time on investment risk issues,
while 68% expect to spend more time on operational risk
issues. Only 25% of respondents, however, had a chief
risk ofﬁcer.
"Institutional investors are up against some formidable risk
pressures, from new regulations to transparency concerns
to investment risks across the board," says Debra Baker,

Yet on the crisis theme, Dr. Markowitz notes: "The crisis of
2008 was different. So was the crisis that started in March
of 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."
LatinFinance - January/February 2015

Table of Contents for the Digital Edition of LatinFinance - January/February 2015
