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Risk Allocation for Pension Funds: Beyond Measurement to Management

HUBERT SHEN (Director of analytics in the Strategic Quantitative Investments group at Caxton Corporation in New York.)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 1 January 1999

198

Abstract

Risk allocation as currently practiced in pension funds is typically characterized by: 1) measurement of the risk of returns relative to a benchmark, and 2) the assignment of asset class and profit center limits on potential losses that remain within the fund's overall risk appetite, yet do not excessively hinder achievement of performance targets. Recently, there has been an increased effort to make risk allocation more proactive, i.e., to use risk allocation as a tool for adding value, rather than simply as part of a monitoring or “warning flag” system (see “Covering Bases” [1998, p. 45] and Hemmerick [1998, p. 1]). The underlying notion is that allocated risk capital can improve performance when viewed as a target, rather than a limit, if the goal of the fund is to maximize returns, or, specifically, to maximize expected surplus growth aggregated across the fund, for a given total value at risk (VaR) of returns relative to the benchmark.

Citation

SHEN, H. (1999), "Risk Allocation for Pension Funds: Beyond Measurement to Management", Journal of Risk Finance, Vol. 1 No. 1, pp. 29-39. https://doi.org/10.1108/eb022935

Publisher

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MCB UP Ltd

Copyright © 1999, MCB UP Limited

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