A comprehensive global study commissioned by Clearwater Analytics reveals that almost nine out of ten (88 per cent) of 250 senior executives at fund managers across the US, Europe and the Asia-Pacific region have increased their expenditure on stress testing funds over the past year in response to challenging market conditions (please see the attached press release).
The perfect storm of rising interest rates, restricted market liquidity and geopolitical instability is increasing the risk of sudden and disorderly market disruptions, particularly during periods of heightened volatility.
When asked how they intend to reduce the risk of severe ‘left-tail’ portfolio losses over the next 12 months, just under half (49 per cent) of the asset managers surveyed said they would use enhanced quantitative risk modelling or stress testing to identify where they are exposed to market risk.
Asset managers are also increasingly concerned that traditional diversification strategies may offer less protection during extreme market events, as correlations between asset classes rise under stressful conditions.
In response, more than half (54 per cent) of asset managers say they will increase their focus on defensive shares that are less sensitive to market movements and have strong balance sheets, which historically experience less severe drawdowns.
Furthermore, 56 per cent of asset managers say they will put protective puts in place, which involves buying options on major indices such as the S&P 500, which guarantee a payout if the market falls below a certain strike price.
More than a third (34%) of survey respondents say they will use volatility products – such as buying call options or futures on the CBOE Volatility Index, which rise in value as share prices fall – to mitigate severe losses.
Just under a quarter (22 per cent) of survey respondents will allocate funds to tail risk funds over the next 12 months, and 16 per cent will invest in real assets, which are widely regarded as safe havens.
