Institutional investors approach risk with a heightened level of rigor. They are driven by fiduciary standards that demand a deeply integrated and proactive strategy for managing portfolio exposures.
A key difference between institutions and independent managers lies in how they handle risk—rather than reacting to it, institutions anticipate and incorporate risk at every stage of the investment process.
For independent managers looking to formalize their risk management frameworks, we've created a practical guide on implementing institutional-grade risk management within your fund management business.
Risk management at the institutional level is not a compliance afterthought, it’s embedded into every investment decision before it’s implemented. Dedicated risk teams work alongside portfolio managers to measure, monitor, and adjust exposures dynamically.
What You Can Do:
- Shift from a reactive to a proactive approach. Treat risk analysis as a key part of the investment process and not just a quarterly report.
- Leverage technology to track real-time portfolio risks instead of relying on static spreadsheets.
- Make risk a standing agenda item in investment meetings.
What Institutions Do:
Institutions don’t rely solely on external data to guide decision-making. They recognize the value of internal insights and leverage performance analytics to understand what’s driving returns and what’s working as intended.
What You Can Do:
- Develop a centralized data repository to track and analyze portfolio performance over time.
- Invest in performance analytics tools that go beyond basic attribution, helping you identify both the strengths and weaknesses of your existing process.
What Institutions Do:
They simulate extreme scenarios to understand how their portfolios might behave in different conditions. They test for liquidity shocks, geopolitical events, and market crises, etc.
What You Can Do:
- Regularly stress test your portfolio against various macroeconomic and market scenarios.
- Identify tail risks—what events could cause unexpected losses?
- Use scenario planning to adjust allocations before risks materialize.
What Institutions Do:
They incorporate hedging strategies to manage downside risk without compromising long-term returns. They avoid over-hedging, which can erode returns if not carefully structured.
What You Can Do:
- Identify cost-effective hedging tools that work with your investment strategy.
- Use hedges selectively to protect against extreme market moves without constantly dampening performance.
- Regularly reassess hedging strategies to ensure they remain effective.
What Institutions Do:
They don’t set a risk policy once and forget it. They continuously reassess and adjust based on evolving market conditions. This is facilitated by implementing dedicated risk committees that regularly review exposures and stress test assumptions.
What Independent Managers Can Do:
- Schedule regular risk reviews—even if it’s just you and a small team.
- Use automation where possible to continuously track portfolio exposures in real time.
Independent managers may not have the same resources as the largest institutions, but that doesn’t mean they can’t adopt the same principles. By thinking about risk management first and making it a standard part of the investment process, smaller players can build a more resilient approach to managing risk—without needing a dedicated risk team or a billion-dollar budget.
