Six Things to Discuss at Your Next Risk Management Cocktail Party
As the Axioma team looked back on 2016, we realized that it truly was a watershed year for markets and managers. And we started pondering the question: “Now what?” One thing became abundantly clear – no one really has a clue – at Axioma or anywhere else. If we did, we’d be forever on a beach somewhere (well, at least I would). But, what we do have is a unique perspective on risk solutions, the managers they serve and how they can drive performance. We think it valuable to share our perspective, and that’s the purpose of this blog.
We’ll be sharing our thoughts in short-form here, as well as pointing to more detailed research and white papers developed by leadership, our research teams, risk experts and business leaders. Some of the areas we will be exploring include:
1. The rise of Multi-Asset Class investing: Multi-asset class investing is no different than other types of investing – in the end it is about balancing the trade-off in the portfolio between risk and return. But multi-asset class portfolios are typically constructed differently than single-asset portfolios, which are usually built from the bottom up based on knowledge about the individual securities in the portfolio. Multi-asset class portfolios, on the other hand, are often built from the top down and are designed to meet certain factor-exposures. In this blog, we’ll explore the tools and strategies that facilitate the construction of multi-asset class portfolios.
2. The race for the most insightful analytics. The race for the most insightful analytics. In multi-asset class investing, the individual asset classes that once provided automatic portfolio diversification are becoming more and more interconnected. This leads to increased correlations among those asset classes. And the only way for asset managers to understand and capitalize on those complex dynamics is with mathematical models and truly effective and insightful analytics. The “race” is on to use emerging analytically-driven techniques, such as predictive analytics, AI and deep learning, to find superior insights and drive better performance.
3. The rise of the Quants. More and more portfolio managers are adding quant tools to their investment processes for three main reasons. First, many realize that quant tools are excellent in detecting unintended risks. Second, as asset owners become increasingly sophisticated, they are demanding quant measures and analytics from their asset managers. And third, as asset owners shift their focus to factor investing, quantitative tools become even more relevant and ubiquitous.
4. Smart Beta. When we started evaluating smart beta, we discovered that many products vigorously marketed as smart beta are often neither smart nor beta. Smart beta strategies are supposed to be quant strategies, but many smart beta manufacturers sacrificed portfolio construction techniques for “simplicity.” We will explore how quant strategies come to the rescue of smart beta to bring more discipline and focus to the portfolio-construction process. The result will be “smarter” smart beta products as a result of improved portfolio construction. These products will have greater immunity to sudden market moves that affect performance.
5. Cloud Technology. A recent report by PwC said that 52% of asset-management CEOs believe that cloud computing is strategically vital to the futures of their organizations. The goal? To leverage the scalability and elasticity of the cloud in order to maintain performance. We view the use of the cloud as integral to the analytics discussed above.
6. Regulatory reporting. There is increasing convergence of risk and regulatory reporting. Consistency when talking about risk—from the front, to the middle, to the back office—is now a de facto requirement.
Complexity and change in investment management, technology and regulation are all accelerating. Add in the mounting pressure on performance and fees and you have a perfect storm. To help you weather that storm, we’ll provide our unique perspective on the above topics as well as advancements in the fields of big data analytics, machine learning and artificial intelligence, which only portend good news for the investment industry.
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