Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge

CHAPTER 8

Risk Culture

The traditional role of risk management in investment banks, the creators of the function, was that of a “risk cop.” It was a control function that policed traders so that they remained within their risk limits. Risk managers operated as third-party oversight rather than as a team with the trading desks. They were guided by rigid constraints (dogma) rather than a shared goal. Over the years, risk management in these organizations has advanced from being a policing function to being an active participant in decision-making. The risk management functions within these organizations have grown to be “risk strategists.” In this capacity, they serve as active participants in formulating decisions that rationally balance the potential ...