Buy-side firms are projected to increase their spending on risk technology in 2018 by twofold. This shocking statistic was released in a new research report by Greenwich Associates, Developments in Buy-side Risk Technology.
This monetary jump equates to nearly 700 million USD being spent by investment-manager trading desks to manage all flavors of risk in the coming year. If spending on middle- and back-office systems is added in, that number would likely top 1 billion USD.
In the first quarter of 2018, Greenwich Associates interviewed 54 asset managers, hedge funds, pension funds, and insurance companies to better understand their use of risk management technology.
The analysis, which includes responses from portfolio managers, risk managers, traders, and quantitative analysts, examines current platforms in use, concerns with those platforms, demands for new functionality, and drivers for change in the coming year.
Why the increase in RiskTech spending?
This isn’t the first time that spending on RiskTech has spiked. You may recall that spending also surged just following the financial crisis. Market participants rushed to understand what had happened, then put mechanisms in place to prevent being caught off guard again, and to comply with the onslaught of new regulations. These expenditures in 2008 were defensive. The story today is very different.
Compliance and the management of risk in the portfolio still remain critical components of any asset manager’s or hedge fund’s risk platform. But those functions today are rarely seen as differentiators—they are simply table stakes.
Furthermore, a hyper-focus on counterparty risk that was born out of the collapse of Lehman Brothers in 2008 and MF Global in 2011 has abated. Buy-side portfolio and risk managers today are motivated by risk tools that allow them to explore new investment opportunities in emerging markets and asset classes. In fact, the research showed that over half (55%) of those that said they are planning a change to their risk systems are doing so to expand into emerging markets, and over a third are looking at structured products.
Globally, low interest rates over the past decade have created a search for yield, which means portfolio managers are being more creative when determining how to generate the returns needed to beat their benchmark. As such, ensuring the securities or products chosen by the portfolio manager meet the appropriate risk/reward profile is not only more important, but also more complicated.
It is, in fact, the need to expand into new markets and products that leaves the buy side most frustrated with their existing platforms. Below is a graph depicting the top areas that firms find fault with concerning risk technology.
In the study, participants said the biggest shortcomings of their current platforms are rooted in a lack of flexibility—the inability to create ad-hoc reports, choose between Python and R, model custom curves, and the limited programming language choices. That lack of flexibility matters because it limits the buy side’s ability to enter new markets, utilize new products and trade with new counterparties—all revenue-generating and/or cost-saving activities.
While these areas may be tough to overcome, the report indicates that buy-sides have options today. The Holy Grail of risk systems 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.
Learn more by downloading a complimentary copy of the Greenwich Associates report: Developments in Buy-side Risk Technology.