Survey: Asset Owners Increasingly Cautious About Risk Management

(October 3, 2011) — Asset owners are changing their approach to risk management, according to a new survey by MSCI.

The firms’s study — titled “The Future of Market Risk Management” — found that 80% of institutional investors are now using stress tests, compared to only 27% in the firm’s 2009 survey. Meanwhile, asset owners are increasingly shortening their strategic asset allocation horizon to allow for more dynamic investment decisions and improving systems to better monitor funds.

“The results of our survey clearly show a continued evolution through these uncertain market times with a greater focus on risk management and with more resources dedicated to measuring and managing risk,” Frank Nielsen, Executive Director of Research at MSCI, said in a statement. “The results reflect how risk management has become both a high priority and a more formalized component of the overall investment process for our clients.”

The study revealed that the top three types of risk for asset owners are market risk, counterparty risk, and liquidity risk. Nevertheless, challenges remain in trying to “realistically incorporate inflation and growth changes into market moves,” according to the report. “In a dynamic global environment, deciding which downside scenario to prioritize has also been difficult.”

According to the report, the financial crisis spurred asset owners to develop additional resources including “building proprietary databases, requiring liquidity information from external managers, and restructuring their portfolios to include limited amounts of illiquid assets.”

The study, conducted from May to August 2011, encompassed responses from 85 participants from 26 countries, representing roughly $5.5 trillion in assets under management. Survey participants included AP 2/Andra AP-Fonden (AP2), AP3 Tredje AP-fonden (AP3), Alaska Permanent Fund Corporation (APFC), AustralianSuper Pty Ltd, British Columbia Investment Management Corporation (bcIMC) and Workers’ Compensation Board – Alberta.

Following the financial crisis, risk management has undoubtedly become a more prominent concern among institutional investors. A recent Credit Suisse Annual Hedge Fund Investor Survey, for example, revealed that a focus on risk management issues is continuing to grow, with investors increasingly concerned about high standards of due diligence. 

The study, which collected responses from institutional investors representing $1.2 trillion of hedge fund investments, showed that hedge fund investors are most concerned about investment risk. Other concerns cited in the study included changes in European Union regulations, asset/liability mismatches in hedge funds, changes in US regulations, counterparty/credit risk and asset/liability mismatches in fund-of-funds, exemplified by funds continually seeking to find a balance between using fund-of-funds and investing directly in hedge funds. Comparing this year’s results to those from last year, Edgar Senior, global co-head of capital services at Credit Suisse in London, told Financial News: “Last year it was clear that investors had become significantly more demanding and discriminating than they had in the past. A lot of that has now been institutionalized in the market. The strong conclusion is that we’ve reached a period of stability and emerging consensus.”

Obtain the full MSCI paper — “Back to the Future of Risk Management” — here.