What does operational risk primarily involve?

Operational risk primarily involves the uncertainty of economic outcomes from imperfect fund strategy implementation. This type of risk is related to the day-to-day operations of a fund or investment strategy, including failures in internal processes, systems, people, or external events that can disrupt operations. For example, if a fund's trading system fails or if there is human error in executing trades, these issues can lead to financial losses or operational disruptions.

The concept of operational risk highlights that even with a well-defined investment strategy, the execution of that strategy is subject to various risks that can affect the fund's performance. This distinguishes operational risk from other concepts like market risk or strategic risk, which relate more directly to broader market movements or long-term strategy alignment rather than the operational execution of specific investment activities.