Christopher J. Campisano, CFA
Traditional risk measures may be inadequate in a marketplace with very complex securities. To capture higher returns, investors are willing to take on more risk today than they were a few years ago. Many sponsors, however, manage risk by simply eliminating risky investments instead of designing structures to measure, monitor, and control the risks. Such strategies can be costly.
Although a lot of new approaches to risk management exist, many of them have not been embraced or fully implemented by the plan sponsor community. In a recent survey in Institutional Investor,1 corporate and public plan sponsors were asked, “How do you assess risk in your fund?” About 43 percent of the respondents said they use volatility to assess risk in their funds, about 25 percent said they use beta, about 11 percent use worst loss, about 8 percent use variation from a peer group, and about 6 percent use downside risk. What was a little surprising was that about 7 percent of the respondents said they do not measure portfolio risk at all. They simply do not look at that side of the investment picture. Moreover, the majority of fund managers are not using anything more sophisticated than traditional risk measures, such as beta or volatility—measures that have been in place for about 30 years. In a marketplace filled with very complex securities, those risk measures might be inadequate.
A follow-up question in the same survey ...

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