Market volatility is pushing fund managers to look for robust investment risk management systems, says a report from financial consultancy Celent.
Yet they still have a long way to go because analysis of investment risk has been highly manual, inconsistent and decentralized.
Although 85% of buy side firms surveyed take investment risk into account when considering risk appetite only 31% can actually track their investment risk procedures.
"The ability to monitor all exposures will allow firms to respond swiftly to any form of counterparty credit deterioration while various functionalities such as liquidity risk management capability and comprehensive set of risk analytics and attribution will provide firms the ability to understand their liquidity risk and firm wide exposures at all times," says Cubillas Ding, research director at Celent. Ding co-authored the report entitled, "Derivatives and investment risk solutions for the buy-side: Optimising the risk-return equation."
Ding says that fund managers will look to vendors to provide more robust risk analytics, valuation and attribution tools, comprehensive stress-testing and counterparty risk management. He cites Algorithmics, Calypso; Misys Sophis, Murex, MSCI and SunGard as top providers of investment risk management platforms.
"The continued fallout from the financial crisis has made evident the dangers associated with tail end risk, the over-reliance on a single risk metric, and the need to account for cross-risk dynamics," says Ding. "In a post-crisis environment, there has also been a shift from paslsive to active management of counterparty credit risk, and this requires more accurate and frequent CVA calculations-- from daily to intraday to real time."