Navigating A Shifting Regulatory Landscape - The Importance Of Risk Management

Luxembourg-based Head of Risk Management AIFM, Adela Baho, spoke to AGEFI about the importance of risk management and the ideal risk framework for alternative assets.

What is the main feature of your funds?

The funds managed by our AIFM cover a wide range of investment strategies including private equity, real estate, private debt, infrastructure, fund of funds and hedge funds.

Amongst the strategies you cited, what are the ones investors are mostly looking for today, and why?

Investors are turning to alternative assets in search of higher yield, better diversification and lower risk than the ones offered by traditional asset classes. As recently announced by the FED and the ECB, yields are going to remain lower for longer, with negative yielding debt hitting new records. One of the outcomes of this situation is the increasing share of investments in private debt, private equity and infrastructure assets. The inclusion of the alternative assets, from the investors' perspective, has been beneficial to the risk-adjusted performance of the overall portfolio, and this in both pre- and post- global financial crisis macro-regimes. This broadly diversified portfolio has shown a lower volatility and therefore higher risk-adjusted returns when measured by the well-known measure of the "Sharpe Ratio".

Risk management being one of the core functions of the AIFM, in your opinion, how should the "ideal" risk management framework look for your above-mentioned strategies?

Well, it depends on the strategy. We apply a customised risk assessment for each asset class, at initial investment and on an ongoing basis following the valuation cycle. In any case, it is widely accepted that the aim of risk management is to use a...