Commonfund’s approach to risk management is directed by the Commonfund Risk Management Framework. This “living” framework was created through a collaborative effort involving all areas of the Commonfund as well as input and feedback from clients. The key elements of our risk management framework are as follows:
- – At Commonfund, the philosophy supporting our risk management framework is based upon the belief that a strong risk culture - driven by collective analytical insight, experienced judgment and active collaboration across Commonfund – plays a key role in the establishment of effective risk management processes. The intent of the framework is not to predict the unpredictable; instead, it is a process of analyzing and considering foreseeable outcomes, ensuring that an action plan is aligned to each possible outcome, and moving effectively to avoid unintended risks and mitigate new risks rapidly as new or unexpected developments arise. At Commonfund, we acknowledge that people manage risk and we work collaboratively to enable all members of our staff to perform as risk managers.
- – Commonfund’s enterprise-wide risk management framework seeks to cover all foreseeable risk factors. We believe that the critical first step is ensuring that the risk management process is dynamic, forward-looking and comprehensive in its coverage of potential sources of financial harm, reputational damage or operational failure. Within Commonfund’s risk management framework, several risk types have been identified. It is important to note that there is overlap and seepage between and across risk factors, and that none of the factors should be treated as isolated or independent from each other.
The risk factors that we consider are:
- – A forward‐looking, top‐down stress/scenario assessment of the potential impact to the organization’s long term strategy and investment policy due to fundamental shifts in external factors.
- – Covers all aspects of market risk as well as the returns associated with any investment. This risk also assesses the potential gain distribution to ensure that any investment opportunity offers the potential for a consistent, risk‐adjusted return over time.
- – Risk of loss resulting from human error or failed internal processes or systems, or from external events
- – Any risk that may affect the organization’s balance sheet, such as short to intermediate term financing, swaps transaction to manage interest rate exposure, swaps to manage currency exposure and other structured products.
- – Any risk associated with exposure to, or dealing with certain counterparties. Typically includes an assessment of creditworthiness of one’s trading counterparties using market indicators such as long and short term credit ratings, spreads, trading indicators. Also includes any action to mitigate potential exposure to these counterparties (e.g. collateral management).
- – Risk that arises through the interplay of all the risk types and the need for active risk mitigation.
- – Decomposition of the investment portfolio by immediate cash requirements, liquid strategies, and illiquid strategies.
One example of how the independent risk management team operates is in the area of investment risk. In viewing our investment portfolios in aggregate – a 360 degree perspective -the risk management team is positioned to independently assess the risk / return characteristics of the portfolio, either ex ante or ex post, and provide meaningful feedback to the investment teams if actual performance results in unexpected volatility of investment performance. This feedback loop to the investment teams provides a quality control “wrap” on their aggregate portfolio construction activity, while maintaining the integrity of the investment process. In many ways, the 360 degree view mirrors the perspective of our clients’ investment committees and provides a complement to our investment team’s market assessment.
Our risk management team has developed a proprietary risk management portal using internet technology that tracks our risk processes and communicates those results to our investment teams, as well as other parts of the organization in a transparent and effective manner. The portal serves as a central database and document repository for risk information. Example applications include tracking the due diligence process for underlying fund managers, monitoring daily counterparty risk and distributing MeasuRisk™ reports. It enables a single, consistent view of the data and findings to facilitate collaboration and communication across the organization about risk issues and concerns, and serves as a catalyst for fostering a firm-wide culture of risk monitoring/management. The underlying technology is stable, reliable, secure and easily deployed. In addition to storing documents, the portal supports email notifications, spreadsheet downloads and authenticated access.