What is the ‘Holy Grail’ of Valuation and Risk Technology?
“Institutional investors aren’t just in the investing business—they’re also in the risk business. Generating investment returns is increasingly less about picking the right security and more about managing the risk/reward profile of the portfolio over time.” – Greenwich Associates
It was this premise that set up the findings of a recently released report, Developments in Buy-Side Risk Technology, by Greenwich Associates. The report revealed that investment managers are expected to nearly double their spending on valuation and risk technology in 2018. This equates to just under $700 million being spent on risk systems annually.
What‘s prompting the increased spending?
According to the report, improving returns, more robust risk management and cost reductions are the primary factors driving the modernization of valuation and risk technology.
“Risk management is not, of course, an exact science, as its ultimate goal is to predict the future. And just as every artist has their preferred medium, every portfolio manager and risk analyst also has their own distinct ways of modeling risk.
Risk management platforms of the past, whether built internally by the investment firm or bought off the shelf, were robust but often designed with a singular focus in mind. This has made it hard for investment managers to expand into new markets and new products, as current systems are often insufficient to fully evaluate if the risk is worth the potential reward.
That era is ending, however, as commercially available risk technology now provides an amazing level of flexibility that ensures one firm’s implementation looks nothing like the firm’s across the street. Institutional investors are coming to grips with the size of the opportunity these innovations can offer, and they are spending to ensure they can capture it.” – Greenwich Associates
The ‘Holy Grail’ RiskTech Solution - Custom, Flexible and Integrated
The report concluded on an upbeat note with a summary of what investment managers need from their valuation and risk technology.
“Investors are in the business of taking calculated risks. The financial crisis a decade ago demonstrated on a massive scale both a lack of risk management and flaws in the risk models. As this research demonstrates, the buy-side is continuing to pour money into risk management not only as a hedge to a market downturn, but also as a true source of alpha generating ideas. Those dollars spent are returning more value than ever before, as the breadth and flexibility of third-party systems continue to expand beyond what can reasonably be built in-house for the same cost.
Execution, order, portfolio, and risk management systems were all created in a vacuum in the 1990s to suit the specific needs of the users at those firms and on those desks. Innovative entrepreneurs advanced those ideas 10 steps further, making each of those solutions amazingly customizable and available to the broader market, including market participants that had never had the technology staff and budgets to build them in-house.
Today, the elusive Holy Grail is a single, integrated workflow that allows execution, order, portfolio, and risk data to seamlessly flow around the platform to help whoever needs it at any stage of the investment process. This could be a single system from a single provider, although a very small few are successful jack-of-all-trades. It is more likely to be an amalgamation of the best in the market, tightly integrated via both a unifying desktop experience and free-flowing data between platforms on the back end. None of this is easy, but it is completely doable—and the returns definitely justify the investment.” – Greenwich Associates
For more information, read the full Greenwich Associates report: Developments in Buy-Side Risk Technology