Buy side risk management – Managing fees at risk

Abstract

This article argues that asset management revenues carry substantial market risks. Not only does this challenge the academic risk management literature about the predominance of operative risks in asset management. It also is at odds with current practice in asset management firms. Asset managers do not hedge market risks even though these risks are systematically built into the revenue generation process. This is surprising as shareholders would not optimally choose asset management companies as their source of market beta. They rather prefer to participate in the alpha generation and fund gathering expertise of investment managers as financial intermediaries. At the very minimum asset managers need to monitor their ‘fees at risk’ to understand what impact product design, benchmark choice and fee contract design have on revenue volatility. This calls for a much wider interpretation of the risk management function rather than too narrowly focus on client risks.