In recent years, Cyprus has managed to establish itself as an attractive destination for international fund managers. In fact, according to the influential European Fund and Asset Management Association (EFAMA), the fund industry in our country enjoys the highest growth rate across Europe. The assets under management by Cypriot funds rose by 14% in the first quarter of 2021 to EUR 9.8 billion. In addition, Cyprus as a full member state of the European Union provides a great opportunity for UK fund managers who would like to gain access to the European market, considering Brexit has been effective since January 2021. Furthermore, an extremely important development is that our country as a jurisdiction moved a step closer to the enormous market of India as the latter issued an order, according to which regulated and unregulated funds, managed by a CySEC-regulated investment manager, will be subject to lighter KYC requirements.

Following the above recent and promising developments, the fund industry in Cyprus has a great potential to grow even further. Such growth drives the creation of  many new specialized jobs including positions in Portfolio Management and Risk Management. Since funds in Cyprus are regulated by the Cyprus Securities and Exchange Commission (CySEC), professionals who are employed in the specific industry must comply with the respective guidelines and regulations.

Beyond complying with the relevant laws and regulations, the specialized role of a Risk Manager is not limited to that respect. It is becoming a necessity for the Risk Manager to ensure full clarity and transparency with respect to proper reporting to investors and the relevant risks each fund is exposed to. The Risk Manager must ensure that the investment objective of the fund and the limits set in the prospectus are not violated during the lifecycle of a fund’s operation. It is well known that investors “feel the pain of a loss more than twice as strongly as they feel the enjoyment of making a profit”. Therefore, the Risk Manager shall monitor on a continuous basis the relevant risks and always comply with the investment strategy and investment objective of each fund. As stated in our previous article entitled “Risk Management and its importance for regulated fund management structures” which is available on CIFA’s website, in the case of a limit breach, an escalation process must be in place aimed at ensuring and safeguarding investors’ interests.

The combination of compliance with regulation and safeguarding investors’ interests, have expedited the importance of utilizing the services of a qualified and experienced risk manager. Gathering and processing a significant amount of data, categorizing them in various ways and translating them in a way that applies to the risks faced by a fund, require specialised knowledge and expertise. Furthermore, a good understanding of translating data to market, liquidity, counterparty, credit, and operational risks as well as setting limits is of extreme importance as these are the minimum requirements for  achieving compliance with the AIFM regulation both from a quantitative and a qualitative aspect. Examples of ways of monitoring the above risk limits include, but are not limited to:

• Market Risk – Following certain market developments, interest rate movements and measuring the P&L of positions which are affected from the market changes.
• Liquidity Risk – By utilizing bid-ask spreads to categorize certain securities in terms of how quickly those securities can be bought or sold.
• Counterparty Risk – Monitoring the creditworthiness of the issuers of specific securities and evaluating how severe impact a potential adverse development could have on the fund and consequently on investors’ interests.
• Credit Risk – Monitoring certain credit ratings applying to the issuer or a specific security and monitoring any changes in those credit ratings.
• Operational Risk – Using the appropriate systems and software and ensuring compliance of the personnel with internal policies and guidelines.

With many funds currently operating and investing in Cyprus, contributing to job creation and GDP growth in combination with the presence of an organization such as CIFA (Cyprus Investment Fund Association) which is promoting the country as a safe European jurisdiction, Risk Management for regulated entities as a service has increased its importance and necessity. In addition, with the potential of many international big players operating in the fund industry, creating a presence or establishing their headquarters in the country, a great opportunity to set up a solid risk management function from the very beginning, arises. Thus, as the role of risk managers has been proved to be less pivotal during the past few years, today it is commonly accepted that risk managers’  role is crucial and it must be assured that they have the tools for the proper monitoring of relevant risks and safeguarding investors’  interests.