In order to understand risk management from a manager research perspective, we first need to describe what we
define as risk.

In the context of investments, we understand risk to be the dispersion of returns on an investment around the expected return. Risk is the probability of losing some or all of your investment, but can result in outperformance over the short-term i.e. taking excessive risk may lead to outperformance while putting your capital at excessive risk. In the context of manager research however, this identification of risk can be somewhat opaque as you may not know how much risk your asset manager is taking just by looking at past performance.

Placing managers on our “buy list” because we deem them as skilful, if in fact they are not, is one of the largest and most obvious risks. In addressing risk management in the context of manager research we have broken this down into three parts. Risks relating to the quality of the managers that appear on our buy list, risks relating to the understanding of how managers are likely to perform in different market environments and risks relating to regulation and legislation, which has attracted a growing amount of focus over time.

We touch on each one of these risks in turn in this article. It is also important to note upfront that these risks are not rewarded (unlike investing in assets), and the risk management process aims at avoiding or mitigating them completely