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1、715CHAPTER 49 BUDGETING AND MONITORING PENSION FUND RISK William F. SharpeThis article describes a set of mean variance procedures for setting targets for the risk characteristics of components of a pension fund portfolio and for monitoring the portfolio over time to detect significant deviations fr
2、om those targets. Because of the significant correlations of the returns provided by the managers of a typical defined - benefit pension fund, the risk of the portfolio cannot be characterized as simply the sum of the risks of the individual components. Expected returns, however, can be so character
3、ized. I show that the relationship between marginal risks and implied expected excess returns provides the economic rationale for the risk budgeting and monitoring being implemented by a num- ber of pension funds. I then show how a fund s liabilities can be taken into account to make the analysis co
4、nsistent with goals assumed in asset/liability studies. I also discuss the use of factor models and aggregation and disaggregation procedures. The article concludes with a short discussion of practical issues that should be addressed when implementing a pension fund risk - budgeting and - monitoring
5、 system. Institutional investment portfolios are composed of individual investment vehicles that are gen- erally run by individual managers. And traditionally, each of the components of a portfolio is an asset whose future value cannot fall below zero. In this environment, the total monetary value o
6、f the portfolio is typically considered an overall budget to be allocated among investments. In a formal portfolio model, the decision variables are the proportions of total portfolio value allocated to the available investments. For example, in a portfolio - optimization prob- lem, the “ budget con
7、straint ” is usually written asXii=1, (49.1) where X i is the proportion of total value allocated to investment i . Reprinted from the Financial Analysts Journal (September/October 2002):7486.CH049.indd 715CH049.indd 7158/28/10 8:52:00 PM8/28/10 8:52:00 PM716 Part III: Managing RiskPension RiskThis
8、approach does not work well for portfolios that include investments that combine equal amounts of long and short positions. For example, a trading desk may choose to take a long position of $ 100 million in one set of securities and a short position of $ 100 million in another. The net investment is
9、 zero, but the same would be true of a strategy involving long positions of $ 200 million and short positions of $ 200 million. For this type of portfo- lio, some other budgeting approach may be desirable. One solution is to include a required margin, to be invested in a riskless security, and to st
10、ate gains and losses as percentages of that margin. This approach may suffice for a fund that uses few such investments, but it is less than satisfactory for funds and institutions that use large short and long positions. In recent years, hedge funds and financial institutions with multiple trading
11、desks have developed and applied a different approach to this problem. Instead of (or in addition to) a dollar budget, they use a risk budget . 1 The motivation is straightforward: The goal of the orga-nization is to achieve the most desirable risk return combination. To obtain expected return, it m
12、ust take on some risk. One may think of the optimal set of investments as maximizing expected return for a given level of overall portfolio risk. The level of portfolio risk provides the risk budget, and the goal is to allocate this budget across investments in an optimal man- ner. Once a risk budge
13、t is in place, the manager can monitor the portfolio components to assure that risk positions do not diverge from those stated in the risk budget by more than prespecified amounts. Recently, managers of defined - benefit pension funds have taken an interest in using the techniques of risk budgeting
14、and monitoring. To some extent, their interest has been motivated by a desire to better analyze positions in derivatives, hedge funds, and other potentially zero -investment vehicles, but even a fund with traditional investment vehicles can achieve a greater understanding of its portfolio by analyzi
15、ng the risk attributes of each of the components. PENSION FUND CHARACTERISTICS Much of the practice of risk management in financial institutions is concerned with short - term variations in values. For example, a firm with a number of trading desks may be concerned with the effect of each desk on th
16、e overall risk of the firm. Risk - management systems for such firms are designed to control the risk of each trading desk and to monitor each to identify practices that may be “ out of control ” may be adding more risk to the portfolio than was intended. Often such systems use valuations made daily (or even more frequently). Moreover, the horizon over which risk is calculated is typically measured i
