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Institutional Investors Shift to New "Extreme Risk Budgeting" To Beat Risk-Free Rate Over Long-Term, Riskdata study reveals
March 16, 2009
Paris, France — Riskdata, the leading risk management provider for pension funds and other institutional investors, today released a new comparative study which reveals that investors can hedge their portfolio against catastrophic "perfect storm" financial market events at no cost through quantitative risk management techniques. Entitled "Keeping the Devil in its Box", the paper looks at how - in the wake of a market meltdown — institutions can manage portfolios and cap potential losses by integrating extreme risk budgeting into their investment process.
Extreme risk budgeting is a technique of setting up and complying with a limit on the maximum loss of a portfolio. Such extreme risk budgeting not only caps losses in a "perfect storm" type of event, but crucially can often cost only a marginal amount in terms of "business as usual" performance. And, when extreme risks are under control, an investor can take more "business as usual" risk.
Riskdata's study compares four recognised portfolio construction techniques — Capital Allocation, Risk Allocation, Markowitz and FOFiX — to demonstrate how investors can best keep such extreme risk under control. To illustrate this, Riskdata relies on purely quantitative analysis to avoid any bias stemming from any ex-post knowledge of funds' performance.
"We're seeing more and more pension funds and other institutional investors shifting their focus from "business as usual" risk premium and volatility to extreme risk budgeting because this approach, post the market crash, appears to be the only way over the long term to exceed the risk-free rate while matching liabilities," comments Olivier Le Marois, Chairman at Riskdata. "This study demonstrates that setting extreme risk budgets and using robust quantitative models can create strong value at acceptable cost both in "business-as-usual" periods and in periods of instability. This is because it actually allows investors to take more every day risks while using cheap and effective hedges to cover extreme risks."
Riskdata's research also shows that an extreme risk budget can be set up to deal with the challenges of very illiquid assets, such as hedge funds, real estate and private equity. In addition, it demonstrates that extreme risk budgeting requires quantitative models capable of handling "hidden" risks, such as the ones which materialized with the sub-prime crisis.
The full "Keeping the Devil in the Box" paper is available by visiting www.riskdata.com
About Riskdata
Riskdata is a renowned provider of quantitative risk management tools developed for the hedge funds, funds of funds, mutual and pension funds and asset managers. Riskdata is the only risk control developer that manages both systemic and specific risks.
Combining the expertise of professional daily market watchers with state-of-the-art software, Riskdata provides solutions for sustainable asset growth. Riskdata tools enable investment professionals to generate detailed and highly customized risk reports, creating comprehensive and decision-oriented risk transparency.
Headquartered in Paris, France with regional offices in New York, London and Moscow, Riskdata services over hundred and fifty top financial and investment institutions worldwide.
Riskdata's mission is to empower the investment industry to create value by providing highly advanced result-oriented risk management solutions. Our products and expertise help industry professionals to mitigate risks, make informed investment decisions, and secure stable and differentiated growth.
For further information, or a full copy of the report please contact
Media
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Annette Bronkesh
+00(1) 973 778 8648
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UK: Fishburn Hedges
Andrew Marshall/Liz Larvin
Tel: +44 (0)20 7839 4321
liz.larvin@fishburn-hedges.co.uk
andrew.marshall@fishburn-hedges.co.uk
“The challenge for us was to get an aggregated view of the fund risk profile while tracking the specific risk of each underlying strategy. We think Riskdata is able to address both of these issues simultaneously. Moreover, we can monitor the impact of any portfolio allocation on the fund risk profile.”
Philippe Uzan,
CDC IXIS Multi-Strategy Fund
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