Family Offices and Risk Management

Family Offices and Risk Management

Family Offices and Risk Management Need

Why do Family Offices Need Risk Management?

Endless debate over the factors that contributed to the financial tsunamis of 2007 and 2008 will persist for years to come. However, one cause seemingly brings no disagreement: most, if not all, of the major financial failures during this period were, at their core, failures in risk management.

Family offices were not spared during these financial meltdowns, and many suffered significant financial losses as a result of inadequate or a complete lack of risk management. Only a select few family offices employed risk defeasance measures to mitigate their financial losses during this time. In addition, many of these family offices suffered major losses due to their large allocations to illiquid alternative investments. As a result, these family offices were also unable to benefit greatly during the snap-back rally in 2009.

What are the Key Considerations and Issues of Family Offices and Risk Management?

When considering what to do about managing investment risk, family offices should first understand what constitutes a sound risk management framework. A complete risk management framework must include robust risk measurement, institutional quality risk management and well functioning risk management governance.

Risk measurement is the process of identifying, estimating and evaluating investment risks, such as market and credit risks. Once these risks have been identified and measured, risk management is managing these investment risks to best meet the stated investment objectives. Risk governance involves creating the proper infrastructure, processes and culture that enable a family office to have an effective and well functioning investment risk management program. Furthermore, proper governance provides the appropriate controls and accountability for managing issues and executing decisions surrounding both investment risk and return.

Before a family office creates its investment risk management framework, it must first have a well thought out risk and investment strategic plan that fully captures the “thinking behind” the family office’s risk management infrastructure and processes.

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