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- January 1, 2014: Vol. 26, Number 1

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The danger zones: Successful management of three types of risk can help investors avoid financial catastrophe

by Richard McLemore

 

Warren Buffett once famously noted that it’s when the tide is going out that you find out who is swimming naked. The financial crisis of 2008 once again shined a spotlight on risk-taking across firms and heightened institutional investors’ focus on risk management practices. Immediately following the crisis, investment firms across sectors dedicated significant resources to building or enhancing their risk management function and overall acumen. The process continues through today.

The increased focus has been both naturally prompted by a heightened awareness of the value added through prudent risk management platforms and policies, but also through increased oversight and regulation. Firms, and even industries, that took inappropriate risks were penalized in the crisis by high investment losses and, in some cases, massive corporate failures. In other cases, investors assessed a steep penalty through withdrawal of capital, even changing the structure of cert

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