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Risks for Large Institutional Investors

January 17, 2017

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The ability to anticipate, identify, and react to risks is crucial for the successful performance and longevity of large institutional investors. Risk management needs to be a central focus of policy making and portfolio management, especially as global economic conditions continue to be volatile. As 2017 rolls in, large institutional investors must continue to adapt to and anticipate major risk factors and developments. 

Major areas of risk for large institutional investors include:

Impact of Geopolitical Risks on Institutional Investors

Of the various risks that large institutional investors are considering, perhaps the one that is at the forefront of most fund strategies is geopolitical risk. This is not so much a single identifiable source of risk, but rather the entire “climate” that encapsulates wide-ranging issues.

For instance, major events such as the Brexit vote and the U.S. election have initiated concerns and discussions on issues, including:

  • Trade protectionism
  • Stock market fluctuations
  • Climate change
  • Various other global issues

Other geopolitical risk factors for institutional investors to consider include the politicization of central banks, national policies on technology (especially cybersecurity), and leadership transitions (such as those in China).  

Energy and Low Prices of Oil

Along with geopolitical uncertainties, another main risk factor facing institutional investors is that of energy and the price of oil. In particular, the relatively low price of oil has placed tremendous strain and pressure on the budgets of some governments. 

A particularly concerning situation can occur when governments begin spending money that has been deposited into sovereign wealth funds. Spending the fund money rather than the investment income that they generate can threaten the long-term viability of such funds. 

Competition in Alternatives

Sovereign wealth funds and pension funds are finding fewer opportunities in alternative assets such as private equity and infrastructure. Part of this change arises from governments seeking to sell off infrastructure to take advantage of demand. On the other hand, real estate appears to be less risky at the moment, as large institutional investors are rushing to buy up core properties. Some sovereign wealth funds appear to be taking advantage of rising real estate demand, especially in the area of industrial properties.  

Private Markets and Illiquidity

Many sovereign wealth funds have been expanding their asset allocations to include private and emerging markets in addition to traditional asset allocations. For instance, many sovereign wealth funds have expanded their portfolios to include alternative, unlisted, and private investments. While many sovereign wealth funds have demonstrated success in private markets, there is still the ongoing debate as to whether the returns for such investments is worth the risks. 

In particular, illiquidity is one of the main risks associated with such investments. In addition, a low interest rate environment is creating new challenges for investors. In response, large institutional investors may need to reevaluate their investment methodologies and portfolio management strategies. 

Disclosure of Risks Climate Change and Other ESG Factors

Finally, environmental, social, and governance issues still continue to encompass various risks, especially with regards to climate change. However, the challenge in this area not only has to do with dealing with the risks themselves, but in fulfilling ever-stricter reporting and transparency requirements. Regulators around the world are increasingly requiring companies and investors to disclose information relating to environmental, social, and governance (ESG) factors.

In particular, ESG factors should be disclosed when they are relevant and material factors in investment decisions. Investors will need to identify and accurately explain how ESG factors affect investment risk management policies and systems. While these are definitely positive requirements, such disclosure requirements will definitely take time and resources to implement. 


These are some of the large-scale risks for large institutional investors to monitor as they move into 2017. These are on top of conventional risk factors like those arising from fraud, abuse, misconduct, and negligence by fiduciaries and businesses. Proper guidance and protection of assets will be key in the near future as institutional investors navigate the various risks emerging out of current circumstances. 

If you have any questions or concerns regarding risk management and resolution of legal conflicts, contact us today at Kessler Topaz. Our team is driven by the goal of protecting investors, consumers, and others through court proceedings and other alternative dispute resolution fora such as arbitration. In addition to helping clients obtain financial compensation for losses, we have also been on the forefront in achieving corporate governance reforms to help prevent violations of law and to mitigate risks in various situations.