Risk Management Framework
Middle Eastern Family Office | Winter 2021
Engagement at a glance
This Middle Eastern family office engaged bfinance to design an inaugural risk-management framework for its USD 1.2 billion portfolio and, subsequently, to help implement the new structure.
At the instruction of its board, this investor was seeking to develop a risk management framework that would quantify portfolio risk and put consistent, effective monitoring in place. Previously, the investor had had no formal documentation regarding risk limits, monitoring processes or procedures. Key questions included: Which specific metrics should we measure? How often? What methodology is the most relevant? What should our risk limits be—for example, is volatility “high” when it reaches 14%? When does volatility drop too “low”? What should we do when our risk limits are breached?
- Mapping the risk exposures inherent in the portfolio: starting with a blank sheet of paper, bfinance worked closely with the client to define an overarching risk policy and write risk-appetite statements for the total portfolio, individual asset classes, and manager-specific mandates.
- Translating risk policy into practical ‘risk ranges’: the team collaborated with the investor to translate its existing strategic asset allocation (SAA) guidelines into practical ‘risk ranges’ and derive suitable tactical asset-allocation ranges. By the end of this phase, which took place interactively over the course of several months, bfinance was able to provide the investor with a risk-monitoring framework that was tailored specifically to its day-to-day portfolio management process.
- Implementing the new risk framework: following the design work, the client hired bfinance to implement the new risk oversight programme and provide ongoing risk monitoring services. As part of that service, bfinance now provides the family office with a broad range of monthly reports—including assessments of overall portfolio risk, implied volatility, Value-at-Risk, potential drawdown losses (compared to reserves), risk return drivers, and portfolio diversification—as well as detailed updates monitoring asset class and manager performance.
Our specialist says
While running a regular risk-reporting line, investors inevitably encounter specific problems such as excessive concentration, an issue with integrating private assets, or a risk policy which for some reason does not work at that time. This is why it’s important to think of risk as a ‘service’ rather than risk as ‘data’ or ‘software’.