Yale School of Management

Hedge Fund Survey by CarbonBased Consulting in 2003

Background (http://www.buysidetech.com/news_sep.htm) 400 responses from 300 companies Respondents from Europe (50%), APAC (20%), US (19%) and RoW (11%) SURVEY REVEALS 90% OF FINANCIAL INSTITUTIONS SUFFER LOSS DUE TO POOR OPERATIONAL RISK MANAGEMENT
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Operational Risk Policies

Key drivers behind adopting an ORM are regulatory pressures such as Basel ll and Sarbanes-Oxley. Internal best practice benchmarking exercises and concern over levels of internal losses are also key factors 19% of companies surveyed had no OR policies currently in place. 43% had implemented an ORM within the last two years IT systems failure and regulatory/compliance risks were seen as the most important risks to be dealt with. Few respondents saw key person retention as important
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Losses
21% of respondents expect to suffer a $10K - $100K loss at least once a day

93% had experienced a $10 million+ loss each year

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33% of respondents said their firm would spend >$1 million this year on improving op risk measurement 29% believed spending in this area would be up by over 100% this year over last year

Costs of Benefits of Risk Mgt Spending

Benefits Reduction in operational losses seen as the key benefit. Improved performance measurement also seen as important 36% of respondents expected to see an op risk economic capital decline of more that 20% this year
49% expected operational losses to decline between 10% and 25% over the same period 32% expected to see revenues rise by more that 20% as a result of increased operational efficiency 4

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Operational Risk Management Structure

Just over 20% of respondents have an ops risk committee supplemented by op risk managers at the business unit level 14% have no framework in place at all Ops risk teams remain small - 60% have a team of between 1 and 5 people 48% did not believe the size of the team would increase in the next 12 months
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Technology Infrastructure
Internal loss databases (48%), self assessment tools (46%) and internal reporting tools (44%) are the most commonly implemented technologies either already implemented or currently being implemented Less than 20% have a statistical modeling tool or AI/expert systems modeling tool in place 68% of respondents are choosing to build at least one ops risk system in house (cost and lack of functionality are the most commonly cited reasons) 48% are planning to implement one of the advanced measurement approaches listed under the Basel II document
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Obstacles to ops risk management

4 of the top 5 obstacles cited are issues with data (modeling ops risk, collating sufficient volume, mixing qualitative and quantitative data and ensuring quality of data used).