Buy Side vs Sell Side Market Risk Management: What is the difference?

Buy side institutions, such as pension funds, asset managers, hedge funds and the like have a very different perspective to market risk management. Unlike the sell side such as bank, the priority of the buy side is their performance against some benchmark, by which they can determine the extent to which they add value through either asset or security selection. This is what we term the alpha of the portfolio and estimating alpha is at the heart of evaluating an asset manager’s performance. This can be contrasted with beta – the source of systematic risks, driven by market factors. Hence asset managers on the buy side, use VaR like measures just like their colleagues on the sell side. The difference being that they focus on relative measures of risk so called TaR measures (tracking error at risk) which capture variation of returns relative to some predefined benchmark. The sell side typically focuses on absolute return volatility (traditional VaR measures). Also depending on the type of asset manager (e.g., alternative investors), they often have longer investment horizons, and are more concerned with liquidity risk issues.