Mastering Illiquidity: Risk management for portfolios of limited partnership funds

17

Risk Management Policy

The final chapter of this book is concerned with risk management policy, which links a firm's investment strategy with its organizational setup and its systems and procedures. Essentially, risk management policy sets the framework for a financial institution to coordinate and execute its activities and hence plays a key role in the decision-making process. There is a growing awareness that failures and near-misses within financial institutions have been caused, or at least perpetuated, by deficiencies in risk management systems and policies. Against this background, the European Securities and Markets Authority (ESMA, 2011) has recently identified three areas of particular importance for the management of financial risks:

(i) the establishment, organization, role and responsibilities of a permanent risk management function, including requirements in respect of its reporting to senior management and its functional and hierarchical separation from other operating units including portfolio management;

(ii) the establishment of a risk management policy and the process and frequency for the assessment, monitoring and review of this policy; and

(iii) the processes and techniques for the measurement and management of risk including the use of qualitative and quantitative risk limits for certain types of risk.

In many financial organizations, the development and implementation of an effective risk management policy has therefore been given high priority. Although ...