Strategic Risk Management: A Practical Guide to Portfolio Risk Management

Preface

In the wake of the global financial crisis, investors of all types, institutional funds, retail investors, and endowments, have had some response to what they have learned. The range of responses has been wide.

Some funds have reevaluated investment risk by incorporating a higher chance of more extreme market events in their risk expectations or assessing whether the expected diversification benefits provided by the mix of asset classes were valid. Others have reevaluated their tolerance for investment risk; the intellectual exercise of assessing risk tolerance beforehand is no substitute for actually experiencing and feeling investment risk when it happens. Some funds have chosen to reduce their reliance on a static strategic asset allocation, sometimes referred to as a set-and-forget approach, in favor of a more dynamic approach; this is usually termed dynamic asset allocation or strategic tilting. Further diversification is the approach others have taken. This may involve diversification in terms of (1) the addition of, or increased allocation to, alternative asset classes, or (2) better diversification within asset classes, usually some “indexed” approach that takes an other-than-market-capitalization approach. Finally, the active-passive decision has been challenged—the decision to employ active investment managers as opposed to simply gaining market participation through index funds.

What is immediately obvious is that different investors experienced risk differently. ...