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Risk Management

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 Commonfund  as well as input and feedback from clients.  The key elements of our risk management framework are as follows:

 

  • Risk Philosophy – 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 the firm – 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.
  • Risk Coverage – 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 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:

 

  • Strategic Risk A forward‐looking, top‐down stress/scenario assessment of the potential impact to the client's long term strategy and investment policy due to fundamental shifts in external factors.
  • Investment RiskCovers 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.
  • Operational Risk – Risk of loss resulting from human error, failed internal processes, systems or from external events.
  • Balance Sheet Risk Any risk that may affect the client'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.
  • Credit / Counterparty Risk  – 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).
  • By‐Product Risk –  Risk that arises through the interplay of all the risk types and the financial intermediation process for active risk mitigation.
  • Liquidity RiskDecomposition of the investment portfolio by immediate cash requirements, liquid strategies, and illiquid strategies.

One example of how our 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, 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