Fees at Risk

What had been seen as an annuity stream that was thought to expose firms to little or no earnings risk turned out to be directional stock market exposure combined with high operational leverage. Asset management companies, however, should hedge the risks of large swings in their P&L due to changes in asset-based fees in accordance with well established risk management principles. While alpha risks are regarded as core risks (it is the business of an asset management company to exploit these risks in return for fees), beta risks arising from client benchmark exposure are incidental. We suggest both the hedging of production risk (fees at risk) and capital market related business risk (redemptions by clients either to shed risk or to raise cash).