Why Do So Many Asset Managers Continue to Rely on Old Risk Management Systems?

The failure of risk management systems to warn of the global financial crisis spurred immediate changes in the wake of the collapse. In asset management, the chief risk officer emerged as a prominent force in an environment of substantially expanded risk management, reporting and regulation. Yet the basic risk management systems used by asset managers — and the risk tools sold by vendors — have been painfully slow to adapt to this new environment and the new role now being played by the CRO. Despite the hard lessons of the crisis, most institutions continue to rely on what are fundamentally pre-crisis risk management products and practices, built on 1990s legacy technology.

Why? Let’s review the bidding.

In the wake of the crisis, the role of the chief risk officer was transformed from a fundamentally middle office, ex-post reporting function, to that of a key player in the overall investment process. As part of their expanded responsibilities, CROs began to interact directly with portfolio managers in the front office to ensure such things as compliance with the risk appetites of asset owners, i.e. their clients.

But there was one big problem: The risk systems used by the middle office were different from the risk systems used by the front office — and that resulted in serious inconsistencies in terms of risk analysis.

In the middle office, it was the CRO’s job to report investment risk to regulators, upper management and the firm’s clients. To accomplish that, CROs used risk systems built specifically for the middle office — systems designed to generate risk estimates by looking at portfolios from a variety of asset classes, as well as aggregations of portfolios from multiple portfolio managers and across multiple asset classes. Click to read the rest of the article.

Sebastian Ceria

Sebastian Ceria is Chief Executive Officer of Axioma and founded the company in 1998. Prior to Axioma, Sebastian was an Associate Professor of Decision, Risk and Operations at Columbia Business School from 1993 to 1998. Sebastian has worked extensively in the area of robust optimization and its application to portfolio management.  

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