Pension Funds - No Place for Excessive Risks

Implications: The reality of pension fund management is simple:  fund managers have a fiduciary responsibility.  What that means is risk management is at the heart of managing pension funds.  Today, more than ever, risk management must go beyond the quest for higher returns. 

Analysis: Currently we are beginning to refocus on the fact that pension funds are financial intermediaries, and must be managed as such.  In the past, pension funds have focused on maximizing return for a given level of default risk.  Thus the interest in hedge funds.

However today, managers are re-embracing the fact that default risk is only one aspect of risk in pension funds.  All aspects of risk (e.g., asset-liability issues) must be incorporated into a total risk management perspective/plan. 

Managers of pension funds must understand the inherent risk of hedge funds under consideration.  (Note:  Different hedge funds have different risk profiles.)  When looking at hedge funds, pension fund managers must question the impact on the total/overall risk in their pension fund.  Pension fund managers can no longer focus only on returns.