Market risk 147
Here’s another thing: key man risk does not only apply to the man-
ager’s senior trader. It also extends to other individuals who may be
solely responsible for certain critical functions, for example in compu-
terised trading systems it could be the head of software development,
in some funds of funds it could be the CEO and in some cases it might
be the CFO or COO. Thus, when considering key man risk it is useful
to broaden your investigation to examine whether there are any indi-
viduals within the manager who are exclusively responsible for any
of the manager’s significant functions. The litmus test is to check
whether their potential departure could endanger the management of
your assets.
Key man risk is reduced where there is duplication of roles and or
processes in the eventuality of a key person being unavailable. Ideally,
most managers will have individuals who are able to cover for each
other in the event of an employee’s short- or long-term absence. There
may also be processes or redundancy plans to organise at least the
orderly liquidation of a portfolio in the absence of a key person.
Market risk
Market risks are broad by definition and can be deemed so hard to pre-
dict that they are not given the value they deserve by many investors.
Don’t be put off by any complications, after all if it is hard for you it is
hard for everyone. There is in any case a lot to be understood from the
analysis of a fund’s market risks and even if you only touch the surface
of the relevant risks by endeavouring to work them out you will ask
the right questions of the manager and gauge how it has approached
the issue. It is again in how a manager approaches risk that you will
find strengths and weaknesses.
A fund’s market risks should include an understanding and review of
specific market sectors. This could be in relation to the various finan-
cial instruments traded by the manager and held by the fund or it
could be in relation to certain relevant geographical areas where the
fund has positions. Both of these aspects are affected by changes to
markets. A chat with the manager should establish whether it is, for
example, investing vast parts of the fund’s portfolio in Japan. If this

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