Before you decide to hire a risk manager, ask yourself…

By Ken Akoundi PhD & Brett Friedman

Markets continue to push pensions and endowments to hire risk managers. And yet, most don’t have a clear idea of their exact role. They should.

Ask 100 traders or portfolio managers what a risk manager is supposed to do, and you will get 200 different answers. Since risk managers started entering the scene in the early 90s, their exact role has been hard to pin down. Everyone knows they want one, but few know exactly what they’re supposed to do. Even those with extensive risk management departments can’t answer them clearly and concisely. Some of the worst trading disasters have occurred in banks with multiple risk layers, types, committees, extensive policies and procedures, expensive risk systems, and a deep bench of quants and compliance staff.

Investors with limited budgets, such as small to medium-sized pensions and endowments, sometimes wonder if they even need a risk manager in the first place. Practically speaking and considering the added cost, they don’t see the benefit. And yet, their consultants and lending banks keep pushing the idea on them. Are they right?