BNY Mellon has co-authored a paper with affiliate HedgeMark called Considering the Alternatives: A Practical Look at Enterprise Risk Analysis and Alternative Investments. The paper, it says, explores the impact of incorporating illiquid or non-transparent investments into enterprise risk analysis.
Enterprise risk includes the many factors that can affect an organisation – market, reputational, regulatory, compliance, operational and legal risk. Enterprise risk analysis also can include forward-looking, or “ex-ante,” calculations that estimate investment risks across multiple asset classes.
The paper focuses on the risks inherent to an investment programme with multiple asset classes owned by a single organisation, such as a pension plan or a charitable foundation. Highlights include:
Different approaches to data management can lead to different potential conclusions about the risks within an investment portfolio.
Investors should use the most granular detail available to evaluate investment risks; obtaining position-level information for all asset classes is the recommended gold standard.
Investors should consider hedge fund structures that can provide position-level transparency, liquidity and control; dedicated managed accounts and liquid alternative funds are increasingly popular structures that offer such features.
Many firms are establishing a chief risk officer function to supplement their risk management responsibilities; the new role requires a significant amount of data to allow investment risks to be evaluated across all asset classes.
Using a single vendor to pull together an institution’s total investment data enables a more uniform approach in calculating enterprise-wide risk and exposure, whereas data across multiple platforms adds to the complexity and likelihood of errors.
Investors should evaluate volatility-based measures like Value-at-Risk (VaR) as just one element of a broader risk management framework that considers other factors such as exposure. They should consider VaR for portfolios relative to the total composite, as a benchmark, or over time, rather than as an absolute value.