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New Blog Digest: Overcoming Challenges with Modeling Complex Instruments
By Rob Garfield | September 6, 2018

Today, buy-side firms are becoming more creative about how to generate returns. In fact, many are exploring opportunities in new instruments and asset classes such as emerging markets and structured products. However, legacy portfolio and risk systems are often unable to handle these modeling challenges.  

This inflexibility in an obstacle to growth. So how are firms dealing with it? Our newly released Blog Digest provides important insight into this topic. Bringing together five of our most popular blog posts, the digest offers important best practices for overcoming the challenges of modeling complex instruments.  

Problems with the ‘Status Quo’ 

Making changes to your modeling capabilities is often difficult whether you use 3rd party software or have an in-house solution. Firms that use a 3rd party solution are completely dependent on their vendor to deliver the new functionality they need, which can take weeks or months. 

The story is similar if the firm’s systems are proprietary. Updating in-house systems can be a difficult and resource intensive effort that puts a strain on often limited quant and technology resources. Another downside of legacy portfolio and risk technology is that it can be difficult to adapt to market shifts, such as OIS discounting, negative rates and the upcoming LIBOR phase out (and resulting replacement). 

Flexibility Matters

The common thread (and inherent problem) with both of these approaches to modeling is that they are very inflexible, limiting, and over time become unsustainable from both budgetary and practicality standpoints.  

As a result, many buy-side investment managers are upgrading their technology with more flexible, customizable portfolio and risk solutions that enable them to easily expand the range of instruments and asset classes as needed. According to a recent research study by Greenwich Associates, 55% of buy-side firms said they are planning to modernize their risk systems with the goal of expanding into emerging markets, and more than 33% are planning to utilize structured products. 31% said that the biggest shortcoming of their current portfolio and risk technology is that it does not allow them to model curves the way they want. “This inherent 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,” stated the Greenwich Report.  

For more insight into overcoming the challenges of modeling complex instruments, download our newly-released Blog Digest