Summary Market, counterparty and concentration risk overlap in investment portfolios in ways that limit-by-limit governance can miss. This article sets out how investment companies should measure and govern these risks together, particularly where derivatives and structured exposures are used.
Market risk Market risk measurement combines VaR, sensitivity, stress testing and scenario analysis. No single metric is sufficient. VaR captures typical exposure; stress captures tail behaviour; sensitivity captures directional bias. Reporting should show all three and explain what each says.
Counterparty risk Counterparty exposure — through derivatives, securities lending, repo, and prime brokerage — requires collateral, netting, margining and concentration governance. Wrong-way risk (correlation between counterparty default and exposure size) is often under-governed.
Concentration Concentration risk is not only single-name; it includes sector, geography, factor exposures, and issuer-family aggregation. Concentration limits should reflect the strategy — a concentrated fund is not mis-managed for holding concentrated positions, provided the mandate and disclosures support it.
Aggregation Aggregation across funds and share classes matters for firm-level exposures (single counterparty, single issuer) even when each fund is compliant individually. Firm-level oversight is a governance responsibility, not a fund-level one.
CRO and board implications Boards should see market, counterparty and concentration through both fund-level and firm-level lenses, with explicit attention to how they interact under stress.
Practical implementation Consistent market risk metrics across funds; counterparty exposure and collateral governance with wrong-way risk analytics; concentration governance at fund and firm level; stress testing that combines the three; risk committee reporting that integrates them.
Limitations Model-based risk measurement is subject to model risk. Governance should include validation, limitations disclosure and periodic recalibration.
Related reading See [Financial Risk](/expertise/market-liquidity), [Model Risk](/expertise/model-risk) and [Investment & Asset Management risk governance](/insights/risk-governance-for-investment-firms).
Frequently asked questions
What should risk leaders know about market risk?
Market risk measurement combines VaR, sensitivity, stress testing and scenario analysis. No single metric is sufficient. VaR captures typical exposure; stress captures tail behaviour; sensitivity captures directional bias. Reporting should show all three and explain what each says.
What should risk leaders know about counterparty risk?
Counterparty exposure — through derivatives, securities lending, repo, and prime brokerage — requires collateral, netting, margining and concentration governance. Wrong-way risk (correlation between counterparty default and exposure size) is often under-governed.
What should risk leaders know about concentration?
Concentration risk is not only single-name; it includes sector, geography, factor exposures, and issuer-family aggregation. Concentration limits should reflect the strategy — a concentrated fund is not mis-managed for holding concentrated positions, provided the mandate and disclosures support it.
What should risk leaders know about aggregation?
Aggregation across funds and share classes matters for firm-level exposures (single counterparty, single issuer) even when each fund is compliant individually. Firm-level oversight is a governance responsibility, not a fund-level one.
What should risk leaders know about cRO and board implications?
Boards should see market, counterparty and concentration through both fund-level and firm-level lenses, with explicit attention to how they interact under stress.