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Risky Popular Perceptions To Change

FINVENT Consulting Services Group  |  13th November 2023

The US Federal Reserve officials have indicated that the cycle of interest rate hikes may have come to an end, unless economic data releases surprise them to the contrary. Combined with an inflation slowdown, the market has jumped to the conclusion that the Fed will be cutting rates over the next year, as the US economy will be entering a recession in early 2014 due to the prolonged tightening financial conditions and a muted economic growth.

The current geopolitical conflicts and the resulting volatility across economies make investors take a defensive stance in their asset allocation, especially at a time that the excess savings of consumers, created during the pandemic may have been nearly depleted due the cost of living having been skyrocketed.
In such an environment, the systematic measurement of portfolio risks remains a critical undertaking for any institutions which manage external capital. Although allocators may have found a good source of yield in the US Treasury market, investors keep a large amount in cash in anticipation of new opportunities presenting themselves after a probable equity market correction.

Perceptions about Investment Risk: Our Answers

Despite the aforementioned conditions, some investment managers tend to underweight the importance of identifying, measuring and reporting their portfolio risks to their clients.

In our experience, the reasons behind such an abstinence may take various forms; we present some of these arguments and provide our relevant thoughts on why they pose a great firm-risk for a financial services institution:

‘We don’t really need risk reports’

  • Since the 2008 global financial crisis, there has been a growing demand from investors and allocators for better risk transparency. Many investors today are making this a critical prerequisite for their selected investments.
  • International regulatory authorities increasingly require funds to regularly calculate specific portfolio risk statistics and to perform stress testing and scenario simulations.
  • Many hedge funds are asked by their Institutional investors to provide frequent risk analysis and management reports, in an effort to identify pockets of concentration or divergence from pre-defined investment policies.

‘We don’t believe in the effectiveness of Value-at-Risk (VaR)’

  • VaR is only one measure of risk. Successful portfolio managers never relay on a single risk metric. This is why a risk management system must calculate a mosaic of risk statistics, among others volatility, correlation, beta, tracking error, Sharpe and Sortino Ratios, as well as globally acceptable methodologies for Stress Testing and Simulation Analysis, both on a historical and fully customized basis.

‘We have our own proprietary Risk Models’

  • Investors today are looking for an independent assessment of the risks in their portfolios, in addition to the manager’s insight and disclosures.

‘We already have a Risk Reporting Vendor’

  • Are you getting good a value for your money? For instance, are you purchasing those modules of a risk platform that apply to your own investment strategies and trading style?

‘We get Risk Reports from our Prime Broker’

  • Most funds nowadays are multi-primed. As risk is not a measure that you can just ‘add up’, you will need to have an enterprise view across all your funds and strategies.

‘We get Risk Reports from our Administrator’

  • Fund Administrators are experts in accounting and not in multi-asset, multi-currency risk measurement.

‘We are not spending money on anything right now, including technology’

  • In the market conditions described above, can you afford to not know and measure your portfolio risks?
  • Aren’t your clients increasingly demanding on better risk controls and integrated risk-adjusted performance reporting?
  • How much would it cost you to lose a key client vs. acquiring a suitable risk management software solution?

‘We understand the potential benefits but I’m presently happy with my Excel sheet’

  • What if someone deletes your Excel files by accident? In a complex fund structure, do you trust all the calculations and figures?
  • What if the individual responsible for the maintenance of these spreadsheets leaves the firm?

A multi-asset, multi-currency risk management tool, properly utilized, can benefit various executive roles in a firm, including Portfolio Managers, the Risk Controller, the CFO and COO, and the Compliance Officer.

For more information on our risk management solutions, please see our KlarityRisk material: and contact us to discuss your specific requirements.

FINVENT Software Solutions is a producer and distributor of financial software applications and custom engineering services for the investment management sector. The firm serves financial institutions in European and African countries, including asset managers, family offices, investment banks, pension funds and hedge funds.

Finvent is the sole SS&C Advent distributor worldwide, and its products are natively integrated with those of SS&C Advent.

Disclaimer: Nothing contained in the aforementioned references constitutes an investment solicitation or a recommendation of any type.