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Mutual Fund Risk Managers

The Job

Risk can be defined as the chance that something can go wrong. Risk managers work to identify risks that can negatively impact business. The establishment of strong risk management protocols is extremely important in the mutual fund industry because mutual funds are not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agencies, and investors can lose money by investing in this type of fund. And when fund performance is poor, investors lose confidence, which can cause mutual funds to lose investment funds and even fail.

According to the Investment Management Education Alliance (IMEA), the most common types of risks that can affect investments in the mutual fund industry are:

  • business risk: the possibility that an issuer of a bond or stock will have financial problems, including bankruptcy, or in the case of a bond, be unable to pay the interest or principal repayment
  • credit risk/default risk: the chance that the issuer of a bond will be unable to make timely principal and interest payments
  • currency risk: the possibility that changes in the price of one nation’s currency will affect another (or example, if the value of the U.S. dollar is strong, the value of non-U.S. securities may decline, and vice-a-versa)
  • interest rate risk: the prospect that interest rates will increase and reduce the value of an investment. The MFEA explains: “Fixed rate instruments decline in value when interest rates rise. Longer-term fixed-income securities such as bonds and preferred stocks have the greatest amount of interest rate risk, while shorter-term securities such as Treasury bills and money markets are affected less.”
  • market risk: refers to risk that affects a certain industry, region, or country (also known as systematic risk).
  • inflation risk: the possibility that the value of an asset or income will decline as inflation reduces the value of a country’s currency.
  • political risk: the chance that government actions, coups, terrorism, or other related events will impact investments.

In addition to risks that directly affect mutual fund investments, there are also many risks that can affect the successful operation of the fund, including those in the following areas:

  • regulatory reporting
  • law
  • information management and security
  • reputation
  • middle/back office oversight

Major duties of risk management professionals include:

  • designing and implementing an enterprise risk management program to identify, assess, and manage risks
  • working with portfolio managers to identify and address risk areas in new or existing investment portfolios, and conducting performance analyses to identify aspects of investment strategies that enhance and detract from fund performance
  • implementing and monitoring stress tests, back-tests, and sensitivity analyses for funds and firm assets
  • working with the company’s chief compliance officer to ensure that compliance filings are made to the Securities & Exchange Commission and other regulatory bodies
  • preparing reports for senior management regarding risk-related issues
  • staying up to date in business, technology, legal, and other areas that may create risk to specific funds or the company on the whole