Risk management, cost centre or untapped source of performance?
Adina Grigoriu, Founding Chairman of Active Asset Allocation, returns to AFPEN‘s Corporate Retirement magazine on risk management as a source of performance.
According to Adina, “there are trends and seasons in finance, as in high fashion.” It is therefore natural that in 2011, three years after the onset of a major financial crisis, she addresses the issue of risk management.
The cost of non-risk management
Adina has often heard the question: “What is the true cost of risk management?”
But this issue is not heading in the right direction. The real question we have to ask ourselves is what the cost of not managing risk is.
For example, does this crisis not show us that we are still paying the uninsured risk taking of some? Unfortunately, investors still see risk management as a punishment.
However, it can be approached from a different perspective: that of the performance potential it represents.
What type of management to adopt?
We must first distinguish between “measurement” and “management” of risks. The first is simple and easy to integrate. The second must be defined according to the objectives and constraints of the investor.
To this end, there are 3 risk management approaches:
- Multi Asset, the most common option to date.
- Tactical management, often used in addition to diversified management.
- Defining and managing a risk budget, a dynamic approach to risk management.
Adina presents in this article concrete examples of the use of these 3 types of management. The 3rd approach (Core Satellite Dynamic or CSD) is undeniably the most advantageous, both in terms of risk management and performance.
Finally, whatever the investor’s problem, risk management is an untapped source of performance!