|
When your horse bolts from its stable, the correct, or at least traditional response, is to shut the door to prevent this recurring. Reports of increased demand for risk management solutions imply that asset managers are following this time-honoured custom.
"From a risk perspective, markets like this create a focus on risk management and risk technology that wasn't there before," says Michael Marks, managing director of BlackRock Solutions, the risk management division of BlackRock. "We're seeing a lot more business, a lot more enquiries."
Asset managers need systems to monitor the risks their portfolio managers are running. While it may seem simple, in fact the risk of a portfolio is much more complex than the sum of risks on each investment.
The precise degree of risk being run by an asset manager is calculated according to complex models of financial markets, a function that is often outsourced to providers either of software, models or risk management.
Marks thinks the surge in demand is directly related to the unstable market environment of the last nine months, as asset managers reassess their allocation of resources. "When you see this sort of market dislocation, risk management gets re-emphasised."
"The risk regime has grown exponentially in the last six to nine months," says Michael Burley, head of risk at Independent Risk Monitoring Limited.
"There are actually several types of risk, all of which combine to affect both markets and the fin-ancial health of their participants, and the risks of each in turn affect each other. Most obvious to the man in the street is the increase in market volatility and other spook-stories of banking losses and credit crises," he said.
Equity market volatility, which in the middle years of this decade ranged between 10 and 15 per cent, has jumped to between 20 and 35 per cent since mid-2007. "The trauma to the fund management industry has been well documented," Burley says.
Credit risk, as measured by the price of insuring against default, has also risen dramatically. Until last summer, the iTraxx Crossover index, which tracks the cost of insuring the debt of mostly junk-rated European companies, was trading at about 200 basis points.
Ongoing concerns
When the subprime crisis hit, this spiked to 450 basis point. Although the market settled into a range of 225-350bp by December, ongoing concerns have resulted in a sustained increase since the beginning of this year to 500bp.
Other risks Burley cites include counterparty risk (the risk that the issuer of your derivative or structured product might go bust), concentration risk - that you might unintentionally end up with exposure to a single risk through different instruments - and valuation risk.
Valuation risk is one way to describe what hit certain enhanced money market funds that discovered last summer they had not correctly valued some of their holdings with exposure to subprime.
"Money market funds that were supposed to be a safe haven suffered heavy losses," says Stephan Gregor, director of product management at FRSGlobal, a provider of risk solutions. "If even the fund managers were surprised by it, imagine how the investors felt."
Although risk management providers other than BlackRock Solutions are seeing a similar surge in demand, some of them have a more nuanced view of the drivers behind it. Regulatory developments in Europe have pushed asset managers to beef up, or in some cases create from scratch, their risk management in recent years.
"The demand is certainly increasing. It started with Ucits III," says Gregor, referring to the European Union's regulatory framework for investment funds that can be sold across EU borders.
The latest version, Ucits III, requires fund administrators to provide risk monitoring services. This requirement has rapidly become more onerous as asset managers use more and more sophisticated instruments, Gregor explains.
"Ucits funds used to be plain vanilla, but now there is short-selling and increased use of derivatives," he says. "The fund administrators and the asset managers need to make sure their risk management is in line with this, and trying to do that on their own is often impossible."
This has led to several entrepreneurial initiatives, as people and companies with risk management skills offer their services to asset managers.
- Financial Times
|
