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New Frontiers Of Risk: Revisiting The 360° Manager

February 2014

Debra Baker

Head, Global Risk Solutions, Asset Servicing


Dr. Harry Markowitz

Nobel Prize-Winning Economist

This whitepaper features
a Foreword by
Nobel Prize Winner
Harry Markowitz, Ph.D.

Table of Contents

Letter from Debra Baker


Risk Management Now

Investment Risk

Credit Risk Management

Emerging Markets Risk

Liability Driven Investing

Operational Risk

Political Risk

Best Practices


In collaboration with Nobel Prize winning economist, Dr. Harry Markowitz, BNY Mellon's Investment Services and Investment Management groups have combined resources with HedgeMark International, LLC to provide an inside look into the institutional investment risk management field.

In our previous white paper, which also included valuable input by Dr. Markowitz, we found that pension funds and non-profits were just starting to take a more serious look at risk management. Now, some eight years later and post the 2008 financial crisis, our 2013 survey shows that risk management is more critical than ever. Among our major findings:

The 2008 Financial Crisis – A New Awakening of Risk Awareness:  The 2008 financial crisis caught many institutional investors off guard. The risk management procedures then in place were widely perceived to be insufficient for a crisis of such magnitude. The drive for more effective, holistic risk management was soon on.

No More Chasing Alpha:  It's down with alpha and up with targeted returns. Institutional investors are placing greater emphasis on achieving absolute return targets as opposed to outperforming a market benchmark. Risk budgets, matching liabilities and avoiding downside risk all play an important role in this shift.

Increased Use of Alternatives:  Survey respondents have expanded their use of alternative investments to improve diversification and potentially help with downside risk. Institutional investors plan to increase their allocations to alternatives over the next five years.

Analytical Tools on the Front Lines of Risk Management:  Analytical tools based upon risk-return analysis and performance attribution continue to be the most commonly used to model, analyze and monitor investments. Total plan/enterprise risk reporting tools are on the rise to encompass traditional and alternative investments, as well as liabilities.

Avoidance of Unintended Bets:  A desire to avoid unintended leverage and to better understand underlying investments has grown markedly since the 2008 financial crisis and appears to be driving institutional investors toward solutions offering greater investment transparency.


Letter from Debra Baker for the Institutional Investor

Risk management is a puzzling proposition for institutional investors. Just as we develop meaningful controls to manage the underlying risks associated with the last market crisis, new risks keep emerging and old ones keep evolving. To help you better understand and manage the ever-changing nature of risk, I am pleased to present the latest in BNY Mellon's thinking, New Frontiers of Risk: Revisiting the 360° Risk Manager.

This white paper provides an inside view into the formidable risk pressures that institutional investors are up against. From new regulations, to transparency concerns, to investment risks across the board, we look into the attitudes and actions of institutional investors to find what has worked for them and what hasn't. To that end, we surveyed over 100 institutional investors, including pension funds and endowment & foundations, with approximately $1 trillion in aggregate assets under management. What they told us has led to some surprising findings, especially when it comes to generating alpha, as shown in the pages and charts that follow.

At the start of this study, we turned once again to the expertise of Dr. Harry Markowitz, the pioneer of Modern Portfolio Theory (MPT), 1990 Nobel Prize winner in economics, and longtime friend of BNY Mellon. Dr. Markowitz collaborated with us on our first risk white paper in 2005, New Frontiers of Risk: The 360° Risk Manager. Back then, the need for more structured and holistic risk management was just beginning to be recognized. Now, almost a decade later and in the wake of the 2008 financial crisis, risk management is a foremost priority of just about every institutional investor.

I would like to extend my personal thanks to all of our clients and prospects who participated in this survey. And to Dr. Markowitz, whose contributions in the field of risk management are as relevant and valuable as ever, we are proud to work with such an esteemed luminary. Together, we are advancing our way through the new frontiers of risk.


Debra Baker

Debra Baker
Head of Global Risk Solutions
BNY Mellon Asset Servicing

Foreword – Harry Markowitz , Ph.D.



The 2013 Survey comprised over 100 institutional investors from around the world. 53% of the respondents are in the United States, 17% in Canada, 27% in Europe, the Middle East and Africa, and 3% in Asia. For purposes of comparability with the 2005 survey, this paper focuses on 88 respondents, 36% of which were corporate pensions, 32% were public pensions, 16% were endowments/foundations and the remaining 16% consisted of other types of institutional investors. A significant majority of these respondents, approximately 92%, were responsible for managing over $1 billion in assets, with 48% managing between $1 and $5 billion, 18% managing between $5 and $10 billion, and 26% managing more than $10 billion in assets. Another 15 sovereign wealth funds and central banks that participated in surveys and interviews are described separately in the appendix.


Sample Survey Findings

Discover How Institutional Investors Rated Investment Policy Measures

Discover How Institutional Investors Rated Investment Policy Measures

Explore Respondents' Views About Risk Management During the Past Five Years

Cost and Benefit of Regulatory Change

Explore Respondents' Views About Risk Management During the Past Five Years

Download New Frontiers Of Risk: Revisiting The 360° Manager to view additional findings »

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