Relative and absolute risk management in a changing market

What it is about

Andrés Felipe Manrique, FRM, chief risk officer of Skandia Latam, explained at the Third Annual Risk Conference (September 2025) how to combine absolute and relative risk metrics to manage portfolios in a changing market.

The 15 slides define absolute metrics (volatility, VaR and Expected Shortfall) and relative ones (tracking error, information ratio and beta), the role of the benchmark in strategic asset allocation, when to use each type of metric, mark-to-market valuation and fees and performance fees, with a case from the 2020 COVID crisis.

Objectives

• Distinguish what each type of risk metric answers: how much loss we can expect or whether we are doing better than a reference.
• Explain the role of a good benchmark and of strategic asset allocation.
• Give criteria for choosing absolute, relative or combined metrics.

Key takeaways

1. Absolute metrics indicate how much loss can be expected and relative ones indicate whether the manager is doing better than the benchmark.
2. In March 2020 the S&P 500 fell 34% and a portfolio hugging the index, with a tracking error of 1.2%, fell 33%: the manager was successful in relative terms, but the client lost a third of their capital.
3. A good benchmark is representative, replicable, investable and consistent over time; a bad one creates perverse incentives.
4. Absolute metrics are recommended for solvency and loss control (prudential regulation); relative ones, for assessing the manager's skill and setting fees; in changing markets the ideal is to combine them.
5. Mark-to-market valuation ensures transparency and avoids accumulating hidden losses, and performance fees are defined against a benchmark or hurdle rate, with clawback provisions.