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Strategic Risk Management. A Practical Guide to Portfolio Risk Management

  • ID: 2213069
  • November 2013
  • 288 Pages
  • John Wiley and Sons Ltd
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Praise for Strategic Risk Management

"A truism of mankind is the frightening specter of society's most recent crises. Most books simply purport to minimize such crises in the future. David Iverson shuns formulaic guides derived from recent events to offer a framework for the comprehensive consideration of risk information. David's framework is a guide to the organization and utilization of risk information with the objective of superior proactive and reactive decision–making. He observes that risk management is not just about measurement or reduction; it is about a strategic paradigm for navigating uncertainty while accommodating the incomprehensible complexity of risk."
Brian Singer, Head of Dynamic Allocation Strategies, William Blair & Co.

"This excellent book addresses those responsible for ensuring that a pool of capital will meet its objectives. It provides a comprehensive framework for identifying and managing the key risks. This book is both lucidly written and highly practical. The case studies serve to illustrate the approach and highlight issues specific to different types of funds. There is wisdom in this book. David Iverson draws on insights gained READ MORE >

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Acknowledgments xi

Preface xiii

Chapter 1 Strategic Risk Management Framework 1

Organizing Framework 1

What Risks Does the Fund Face at Each Level? 4

Summary 11

Putting the Ideas into Action 12

Chapter 2 Governance Risk 17

Why Governance Matters 17

Good Governance 17

Signs of Poor Governance 26

Chapter 3 Investment Beliefs 31

Why Have Investment Beliefs? 31

Knowledge and Investment Beliefs 33

Investment Beliefs and Strategy 33

Categories of Investment Beliefs 34

Examples of Investment Beliefs 35

Approach to Developing Investment Beliefs 35

Putting the Ideas into Action 42

Chapter 4 Fund s Purpose 45

Clear Definition 45

Possible Ways to Express Objectives 46

Examples 47

Chapter 5 Strategic Asset Allocation 49

Guiding Principles 49

Key Steps 50

Capital Market Assumptions 51

Candidate Portfolios 58

Chapter 6 Hedge Funds 87

Not an Asset Class 87

Types of Strategies 88

Characteristics of Hedge Funds 89

Risks of Investing in Hedge Funds 91

Risk and Return Characteristics 96

Good Implementation 100

Reasonable Risk and Return Expectations 102

Chapter 7 Private Equity 103

Types of Private Equity 104

Stages of Investment 104

Features of Private Equity 105

Risks of Private Equity 106

Managing the Risks 107

Fund of Funds 110

Suitability for an Investor s Portfolio 111

Risk and Return Characteristics 111

Reasonable Risk and Return Expectations 112

Achieving Private Equity Allocations 113

Chapter 8 Benchmarks 115

What Are Benchmarks For? 115

Characteristics of Good Benchmarks 116

Market Capitalization and Benchmarks 119

Chapter 9 Tactical Asset Allocation 121

Tactical versus Strategic Asset Allocation 121

Approaches to TAA 122

TAA versus Global TAA versus DAA 122

Investment Beliefs 123

Conditions for Success 124

TAA Process 124

Evidence of Value Added 127

Market Timing and Time out of the Market 130

GTAA 133

Chapter 10 Active versus Passive Management 135

Decision Framework 135

Evidence on Market Efficiency 142

What Barriers Exist to Acceptance of the Concept of Market Efficiency? 149

Chapter 11 Passive Management 153

Physical Alternatives 153

Synthetic Implementation 154

Risk Considerations 154

Operational Considerations 155

Managing Risk with Derivatives An Example of Alpha Beta Separation 155

Chapter 12 Active Global Equities Structure 161

Active Risk and Return 161

Style Risks 163

Management Structure 169

Market Extensions 184

Chapter 13 Active Global Fixed Income Structure 187

Style 187

Management Structure 188

Market Extensions 190

Chapter 14 Manager Selection 193

Hiring Managers 193

Firing Managers 202

Fees 211

Performance–/Incentive–Based Investment Management Fees 212

Chapter 15 Execution 217

Rebalancing 217

Transitioning Managers 221

Chapter 16 Review and Monitoring 225

Levels of Performance Reporting 225

Sample Reports 226

Conclusion 235

Chapter 17 Case Study 1 Defined Benefit Plan 237

Background 237

Financial Position and Actuarial Valuation 237

Engaging an Investment Advisor 239

Investment Objectives 239

Asset Allocation Strategy 240

Chapter 18 Case Study 2 DC Member Investment Choice Fund 247

Plan Characteristics 247

Review of the Plan 249

Investment Objectives 249

Fund Design 250

Investment Strategy 253

Manager Structure 255

References 259

About the Author 273

Index 275

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DAVID IVERSON is Head of Asset Allocation with New Zealand Superannuation Fund. He was previously Director of Institutional Investment Services & Quantitative Research at Goldman Sachs JBWere and has also held positions with Russell Investment Group, ING Investment Management, and ABN AMRO.

Note: Product cover images may vary from those shown
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Note: Product cover images may vary from those shown

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