134
| Strategic Investment Funds
In addition, it lays out its risk framework in ancillary documents,46 and outlines professional and ethical standards in documents such as the Compliance Policy and Conflict of Interest Policy.47 All funds managed by NIIF, as alternative investment funds regulated by India’s capital market authority, must comply with the risk management and disclosure requirements of India’s AIF regulations (2012).48
COMPONENTS OF THE RISK MANAGEMENT FRAMEWORK AND KEY ACTORS The SIF’s risk management framework performs the following key functions: • Clarifies risk appetite. It articulates the fund’s qualitative and quantitative risk appetite in line with its mandate, size, investment policy, and structure. • Identifies and measures risks. It identifies and assesses (quantifying where possible) potential risks that may impede the success of the SIF. • Establishes a governance structure for risk management and a set of procedures that can mitigate and monitor risks (European Union 2011). The public sponsor’s risk appetite is commonly articulated in a risk policy document. The risk tolerance of a SIF cannot be distilled into one indicator but is usually a composite of several indicators that capture the adverse outcomes to which the SIF could be susceptible.49 These indicators are used to assign an acceptable level of risk (for example, an acceptable probability of capital loss) based on the stated purpose of the SIF and the risk profile of its public sponsor.50 For instance, NSIA-NIF’s Investment Policy Statement requires the fund to seek a long-term return target of more than 5 percent of the US Consumer Price Index, but also clarifies that the fund’s investments must be diversified within the infrastructure sector; that it cannot commit more than 25 percent of total assets to any one project or manager; and that no more than 35 percent of total assets can be committed to any specific infrastructure sector in Nigeria (NSIA 2019). The clarification of risk appetite serves multiple purposes, chief of which is to sensitize stakeholders to how the fund’s performance should be evaluated. The articulation of risk appetite is important because it prepares the public sponsor and co-investors for potentially unfavorable factors that could undermine the SIF’s success and jeopardize reaching the fund’s stated objectives (Al-Hassan et al. 2013). The articulation of risk tolerance is also important so that short-term fluctuations do not steer the public sponsor off course (Al-Hassan et al. 2013). In addition, explicit communication of risk tolerance helps ensure that other agents in the SIF’s authorizing environment do not thwart the SIF’s mandate by acting on contradictory views of risk tolerance. For instance, as discussed in chapter 2, a key agent influencing many of China’s government guidance funds (SIFs set up at the national, provincial, and municipal levels) is the State-Owned Assets Supervision and Administration Commission of the State Council, which assesses the funds according to its principles—oriented toward state-owned enterprises—of capital preservation and appreciation (McGinnis et al. 2017). Such principles can conflict with higher-risk-oriented investment strategies that may take years to bear fruit. Like PCFs and SWFs, SIFs are exposed to a wide range of risks, which can be identified in two categories:
