NEW YORK, Jan. 19, 2016
/PRNewswire/ -- As investors continue to boost their
allocations to alternatives, how they address the issue of
enterprise risk can have important consequences for the perceived
risk within their portfolios, according to a new white paper from
BNY Mellon. Enterprise risk analysis, including stress testing and
scenario assessment, has become increasingly popular with
institutional investors. But alternative investments – hedge funds,
private equity, real estate, etc. – present many challenges.
Authored by BNY Mellon and its affiliate HedgeMark, the paper,
Considering the Alternatives: A Practical Look at Enterprise
Risk Analysis and Alternative Investments, explores the impact
of incorporating illiquid or non-transparent investments into
enterprise risk analysis. It looks at how different approaches to
data management can affect the resulting analysis, the associated
benefits and issues, and offers solutions.
"With a sharper focus on risk by regulators and other
stakeholders, many institutional investors seek a fuller picture of
how risk operates across investments within an entire portfolio,"
said Frances Barney, CFA, head of
Consulting-Americas for Global Risk Solutions at BNY Mellon. "Data
is getting more and more critical and investors need to be informed
and comfortable with the assumptions of their risk assessment,
otherwise, they can come out of it with a false sense of security
about their portfolio."
Enterprise risk includes the many factors that can affect an
organization – 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 program with multiple asset
classes owned by a single organization, such as a pension plan or a
charitable foundation.
Highlights of the key findings and insights into best practices
include:
- Different approaches to data management can lead to
different potential conclusions about the risks within an
investment portfolio.
- Use the most granular detail available to evaluate
investment risks. Obtaining position-level information for all
asset classes is the gold standard.
- 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.
- 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.
Consider VaR for portfolios relative to the total composite, as a
benchmark, or over time, rather than as an absolute value.
Already some regulators require reports on stress testing and
scenario analysis, such as through Form PF for U.S. investment
advisers to hedge funds, and pursuant to Solvency II for insurance
companies, and UCITS for European investment funds, Barney
added.
"We've learned the most crucial component is the veracity of the
underlying data, which becomes even more important and difficult to
manage as more opaque assets are held in the portfolio," she
said.
To read the paper, click here.
BNY Mellon's Asset Servicing business supports institutional
investors in today's fast-evolving markets, safeguarding assets and
enhancing the management and administration of client investments
through services that process, monitor and measure data from around
the world. We leverage our global footprint and local expertise to
deliver insight and solutions across every stage of the investment
lifecycle.
BNY Mellon is a global investments company dedicated to helping
its clients manage and service their financial assets throughout
the investment lifecycle. Whether providing financial services for
institutions, corporations or individual investors, BNY Mellon
delivers informed investment management and investment services in
35 countries and more than 100 markets. As of Sept. 30, 2015, BNY Mellon had $28.5 trillion in assets under custody and/or
administration, and $1.6 trillion in
assets under management. BNY Mellon can act as a single point of
contact for clients looking to create, trade, hold, manage,
service, distribute or restructure investments. BNY Mellon is the
corporate brand of The Bank of New York Mellon Corporation (NYSE:
BK). Learn more at www.bnymellon.com. Follow us on Twitter
@BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for
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Information containing any historical information, data or
analysis should not be taken as an indication or guarantee of any
future performance, analysis, forecast or prediction. Past
performance does not guarantee future results. The Information
should not be relied on and is not a substitute for the skill,
judgment and experience of the user, its management, employees,
advisors and/or clients when making investment and other business
decisions. None of the Information constitutes an offer to sell (or
a solicitation of an offer to buy), any security, financial product
or other investment vehicle or any trading strategy.
Contact:
Joseph F.
Ailinger Jr.
+1
617-722-7571
joe.ailinger@bnymellon.com
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SOURCE BNY Mellon