A comprehensive global study, “The Crowded Trade”, commissioned by Clearwater Analytics, which surveyed 250 senior executives at fund management firms across the US, Europe and the Asia-Pacific region, finds credit and liquidity risks across nearly every category monitored by firms.
Market risk has increased for 80 per cent of asset managers over the past year – the largest rise of any risk category in the study – with 34 per cent describing the increase as dramatic.
Around three-quarters (77 per cent) of respondents say credit risk has increased, with 51 per cent stating that it has done so dramatically.
Some 71 per cent of asset managers have experienced increases in liquidity risk, and 36 per cent say these increases have been dramatic.
Meanwhile, 71 per cent say concentration risk has increased, with 29 per cent stating that the increase has been dramatic.
Chris Sturhahn, Head of Product, Asset Management at Clearwater Analytics, said:
“Market, credit, liquidity and concentration risk are all rising at nearly every firm that responded. That is a more challenging problem than any single risk factor changing on its own, and it is a major reason why we are seeing firms move into alternative investments, expand their hedging activities and rotate into new markets and regions. Asset managers need more than just performance data; they need real-time visibility into risk exposures, liquidity conditions and portfolio concentrations. Firms that can aggregate, analyse and act on investment data quickly will be far better positioned to manage uncertainty and respond to changing market conditions.”
Looking across their operations, nearly three-quarters (73 per cent) of asset managers say technology and cyber risk has increased, with half describing the increase as dramatic. Business continuity risk has increased for 80 per cent of firms, with 32 per cent describing the increase as dramatic. Failures relating to people and processes – such as errors in trade execution or inadequate internal controls – have increased for 75 per cent of firms, with 24 per cent describing the increase as dramatic.
Sturhahn said: “Operational risk has become a major focus for asset managers as portfolios grow more complex, reporting requirements intensify and market events unfold much more quickly. Many firms still rely on fragmented systems, manual reconciliations and delayed reporting processes that can create inefficiencies and increase the potential for errors during periods of market stress.”
Reputational risk – meaning damage to a firm’s brand caused by negative media coverage, legal disputes or poor performance leading to investor outflows – has increased for 69 per cent of firms over the past 12 months, with 44 per cent describing the increase as dramatic.
ESG risk – meaning potential losses arising from investments failing to meet environmental, social or governance standards – has increased for 77 per cent of firms, with 31 per cent describing the increase as dramatic.
Competition risk – meaning the risk of losing market share to competitors due to poor performance or high fees – has increased for 72 per cent of firms, with 24 per cent describing the increase as dramatic.
When asked which risks pose the greatest concern to asset managers over the next 12 months, almost two-thirds (62%) of survey respondents cited technology/cyber risk. The next highest risk was liquidity risk (47%), closely followed by credit risk (46%). More than a third (37%) identified concentration risk as the biggest threat in the coming year, whilst 35% cited people and process failures and 28% cited market risk.
Sturhahn added: “Firms are already responding to this by moving into alternative investments, expanding their hedging strategies, and diversifying into new regions and asset classes. The next question is whether these moves will hold up once markets are actually put to the test, which is exactly what we examine next in this research.”
The full findings of the “The Crowded Trade” study are available at https://cwan.com/resources/reports/the-crowded-trade-global-asset-manager-report/
