Mastering Illiquidity: Risk management for portfolios of limited partnership funds

16

Role of the Risk Manager

“Fearing failure, he did not try to win.”

John Keegan about General McClellan (Commander of the Union Armies, 1861–62)1

In this chapter, we discuss the role of the risk manager overseeing portfolios of illiquid assets. While the recent financial crisis and the subsequent regulatory changes have caused a shift in investors' attitude towards risk management for illiquid assets, the adoption of new risk management standards has often been relatively slow. This inertia may be attributed to a combination of factors. A key reason may be sought in the fact that while the value of risk management for minimizing downside risk is largely uncontroversial, the boundaries with compliance have sometimes remained vague. However, as we have emphasized throughout this book, risk management is not just about protection against downside risks. Instead, risk management deals with the question of whether portfolio risk is adequate, which includes upside risk as well. Risk managers in the investment industry, and especially in alternative assets, cannot just focus on risk avoidance; instead, their chief responsibility is to ensure an adequate degree of risk taking, which is consistent with the institution's risk appetite and expected returns.

16.1 SETTING THE RISK MANAGEMENT AGENDA

Risk managers are tasked to develop specific policies, including quantifying the appetite for risk and setting risk limits accordingly. To monitor and report key risk exposures and to develop ...