Capital market disruptions are becoming quite common and their impact on fund managers can no longer be taken lightly. During the Inaugural Asia Investment Management COO Roundtable organized by Stradegi in 2016, COOs agreed that market disruption and its consequences on valuation, i.e. not having readily available or reliable market prices to value funds, usually lead to an operational “crisis management mode” placing a high risk on the firm and its investors. For instance, during mid -June 2015 and again during the first week of 2016, the Chinese market crisis caught asset managers by surprise and the lack of regulatory guidance aggravated the challenge of fairly valuing funds holding Chinese stocks.
Not all risks can be precisely defined by mathematical distributions, with some even defying measurement. Frank Knight famously distinguished between measurable and unmeasurable risks in his dissertation titled ‘Risk, Uncertainty and Profit’, warranting a clearer distinction between the two. Given the variety and breadth of risks inherent in the capital markets, oversimplifying risk to support measurement may be perilous. While managing investment portfolios, not only do the managers have to account for the intended risks, but also concealed risks which can have a significant impact on returns. This in turn makes risk management the very foundation of a well-run investment process and not just a component of the investment strategy.