Risk Management in an Asset Management Company: A Practical Case

Abstract:     
The article concerns the differences between the meaning of risk management in a bank and in an asset management company, and then it illustrates the solution found to the challenge of building up a risk management system in an Italian medium size company.

We describe the specific needs of an asset management company, in terms of proper financial modelling, time and resources constraints, given that an investment company:

- manages "third party funds" (eventual losses are not its liabilities);

- has a relatively long investment horizon, if compared to other market participants;

- often monitors relative risk, rather than absolute risk.

As models for estimating portfolio risk on medium-long horizons are crucial, and the related theoretical problems are absolutely not trivial, we briefly describe the model we use. It is based on bootstrapping, that allows us to calculate several risk measures for a large number of portfolios. It allows us to simulate medium-term to long-term financial scenarios, without imposing any particular probability function, taking into account heteroscedasticity, serial correlation, and any existing market views.

We shortly describe the implementation, with some details on the database and the calculation engine (both available on the market). This kind of system is more straightforward and cheaper to implement than traditional, bank-oriented risk systems: it took less than one year to implement the whole tool, with limited costs (basically some cheap licences and the work of two quants).

We hope that our experience could be of help to other asset management companies.

Keywords: Risk management, asset management, implementation, bootstrap, historical simulation

JEL Classifications: C15,G23,G39

Case and Teaching Paper Series