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Fund Factory Magazine - The Virtuous Circle

Myth or reality

Article: Christophe Pessault, CEO, Arkus Financial Services

THE MAIN MYTH THAT NEEDS TO BE FOUGHT AGAINST IN TERMS OF RISK MANAGEMENT IS THE LIMITLESS NATURE OF FIGURES: CALCULATIONS ARE NOT THE ANSWER TO EVERYTHING, ON THE CONTRARY, THEY ARE ONLY ONE ELEMENT AMONG SO MANY OTHERS.

THE IMPORTANCE OF THE RISK PROFILE

Implementing an effective risk management process requires a very precise value chain to be respected, the cornerstone of which is the establishment of the risk profile, a concept which was already present in the UCITS III regulations in 2002. This exercise requires a good understanding of asset management because it has to be built in co-ordination with the manager. In particular this profile must allow the portfolio’s exposure to various risks and the manner in which they are to be apprehended to be established. There is no one recipe but several answers to be adapted to each case to be able to generate the appropriate signals. In practice we too often see that this exercise is neglected with the focus being on measuring the global exposure, or it is performed in an industrial manner. Without this initial work risk management is only an illusion and is, in the end, restricted to a tick-the-box approach. Measurements are useless if we don’t know what we are measuring, why we are.

THE QUANTITATIVE IN THE SERVICE OF THE QUALITATIVE

One of the notable changes in the regulations is the introduction of a permanent risk management function. This function must ensure the integrity and formalisation of the risk management process. One of the key tasks of the permanent risk management function is to put into context the various indicators used to interpret, and at best, decode the various signals thus generated. The aim is to be able to have a short documented overview of problems that require the intervention of senior management. Risk reporting is too often limited to a graveyard of unpalatable, even inexplicable, statistics that do not give the Board of Directors the peace of mind to take the necessary decisions. Another error we see occur all too often is the physical absence of the permanent risk function from the Board of Directors.

THE OPERATIONAL RISK: A PROMISING FIELD OF EXPLORATION

Identifying operational risks and the likelihood of them occurring, measuring the potential impact and reflecting on mitigation factors are the key to operational excellence because it allows the issues on which to focus to be targeted. Although the exercise may initially seem tedious it is precisely the opportunity to conduct a constructive review of a structure, which in some cases was established several years earlier. In particular it allows resources to be deployed more efficiently.

Check out this new magazine and find out more about Arkus on page 14.