Market Risks in Asset Management Companies

26 Pages Posted: 21 Oct 2010

See all articles by Bernd Scherer

Bernd Scherer

EDHEC Business School - Department of Economics & Finance

Date Written: October 19, 2010

Abstract

This paper shows that revenues from a sample of publicly traded US asset management companies carry substantial market risks. Not only does this challenge the academic risk management literature about the predominance of operative risks in asset management. It also is at odds with current practice in asset management firms. Asset managers do not hedge market risks even though these risks are systematically built into the revenue generation process. This is surprising as shareholders would not optimally choose asset management companies as their source of market beta. They rather prefer to participate in the alpha generation and fund gathering expertise of investment managers as financial intermediaries. At the very minimum asset managers need to monitor their "fees at risk" to understand what impact product design, benchmark choice and fee contract design have on revenue volatility. This calls for a much wider interpretation of the risk management function that too narrowly focuses on client risks.

Keywords: Asset management, market risk, random coefficient

JEL Classification: G11, C33, G30

Suggested Citation

Scherer, Bernd, Market Risks in Asset Management Companies (October 19, 2010). Available at SSRN: https://ssrn.com/abstract=1694685 or http://dx.doi.org/10.2139/ssrn.1694685

Bernd Scherer (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

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