How can an multinational private equity and alternative asset management company

Question

How can an multinational private equity and alternative asset management company like The Blackstone Group hedge the following risks to limit their loses in adverse cases? (I have described the risks, you are being asked to develop and breifly describe hedging strategies for these risks(in bold))

Operational risk:

Incompetent managers that cannot keep track of assets, investments, or clients they are managing and cannot critically evaluate how to best manage their company

Currency Risk:

Currency risk can occur due to fluctuating foreign exchange rates. An investor can be exposed this risk if they are in foreign-currency-traded investments.

Geopolitical Risk:

Geopolitical risk can occur when the relationship between countries is affected by the geography and economics between the countries. Because the world is becoming more globalized due to open trade, the interrelation of two countries can affect their economies or it can be for other reasons like war or internal political unrest which would affect retuns on Blackstone investments in that specific country.

Climate Change Risk:

Climate change risk is a type of business risk that is caused by change in weather on investment return. If governments do not integrate policies that reduce GHG emissions, it could reduce potential economic growth and increased volatility.

--- Climate change can cause indirect and direct consequences on a company. For ex: Leading retailers are noticing the effects of climate change on agriculture. Insurance companies are making their insurance premiums more unaffordable in some regions where weather is becoming more unpredictable.

Explanation / Answer

All risks can be hedged accordingly depending on the volatility observed in risk occurence.

a) Operational risk: To reduce this risk, we need to follow some of the techniques which improves management governance. Some of them are:

i) Deploying a strategy on way they work

ii) Timely checking of internal records and scrutinizing them to reduce risk

iii) Operational integrities after implementing new process, which reduces the double entry or wastage in time on managing assets which are already managed

b) Currency risk: If changes in currency is impacting the top line of the business, then some of the techniques to reduce them are:

i) AMC can start investing in gilt funds, which serves like a hedge option

ii) AMC can invest in currency options, to reduce the risk

iii) AMC can sstart investing in OverSeas mutual funds

C) Geopolitical risk: To reduce this:

i) AMC should invest in companies which has business lines of higher country risk which has more economic and political stability

ii) AMC can also insure an amount of money invested in riskier assets to reduce the loss incurred

D) Climate change risk: To reduce the risk in this,

i) AMC should start investing in companies which has more exposure to environmental friendly awareness

ii) Can hedge them by taking insurance on risks exposed towards environmental issues.

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