Financial Times Guide to Investing in Funds

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