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November 4, 2020 | Blog

Managing Market Volatility and Geopolitical Uncertainty

Are your asset management systems ready?

By Frank Glock, Head of Sales, EMEA, Enfusion

It has been a tumultuous year for the global financial markets and there’s no end in sight to the geopolitical uncertainty. The second wave of COVID-19 is sweeping much of the world. The disputed US presidential election has created upheaval and the threat of a no-deal Brexit looms large. 

Seismic events of this nature often add intense volatility to global markets, creating extreme market turbulence, fluctuating asset prices, and significant volume spikes.

Look at how large-scale events such as the Global Financial Crisis of 2008, the Arab Spring in 2011, and the Brexit vote in 2016 rocked markets. On June 24, 2016 — the day after the UK voted to leave the EU — global panic wiped $2 trillion off world markets. This single day was one of the most dramatic and volatile trading sessions since the financial crisis.

Against the backdrop of an uncertain global landscape, how can asset managers prepare their technology and systems to manage extreme market volatility and simultaneously generate alpha? The following are six proactive strategies asset managers should consider to ensure their systems are capable, scalable, resilient, and ready to handle the volatility ahead. 

  1. Re-appraise risk management models and controls. By running through robust market risk scenarios, asset managers can anticipate, interpret and better respond to changes influencing their investment universe and be more crisis ready. Managers need to ‘stay present’ and continuously predict portfolio change as much as possible, using risk factors, stress-tests and scenario analyses. These risk analyses have become standard practice in the industry. Most managers we talk to have a strong undercurrent of measuring risk and ultimately performing quality control across the portfolio construction and implementation process.
  2. Anticipate regulatory changes. Major geopolitical events are usually catalysts for profound political, fiscal, regulatory and investment Compliance changes. So while it’s important to have strong operational infrastructure in place, there also needs to be agility in the Compliance engine. Geopolitical events often have a direct impact on how regulators recalibrate jurisdictional rules and regulations; just look at the shift in compliance behaviours as a result of MiFID II.
  3. Evaluate managed services and outsourcing options. Maintaining system integrity is essential when volatility is high and volumes spike. From both a people and resource perspective, there must be sufficient capacity to cope with volume surges, while still maintaining the highest possible service levels, to both internal and external clients. One of asset managers’ core challenges is the ability to quickly and efficiently scale to handle increased trading volumes that are often the result of a sharp volatility event. Outsourcing those non-core functions to a trusted managed services provider ensures the systems will be equipped to deliver that service at scale – and at speed.
  4. Consider a native cloud or hosted and distributed models. A key concern for asset managers is having enough capacity on hand to manage large increases in volume and processing activity which usually accompanies spikes in volatility. To alleviate that concern, many asset managers are adopting a native cloud or hosted and distributed models for their infrastructure and hiring experienced and knowledgeable staff who are experts in handling this type of infrastructure. This allows for horizontal scaling, where, as volatility increases, service providers can load-balance horizontally across the entire system. In addition to load balancing, there is also the benefit of resiliency. Distributed infrastructure is quickly becoming a critical component of managers’ business continuity and disaster response
  5. Assess your remote work readiness. The pandemic has pushed many finance professionals into their home offices. This new work from home environment has accelerated asset managers’ migration to the cloud. Many asset managers are confidently using cloud-based systems to manage their entire operations remotely, whether that’s from a resilience site, or from someone’s kitchen using a tablet or mobile phone. With the cloud and the right platform infrastructure in place, wherever there’s secure internet, you can confidently run your business.
  6. Communicate with your end-investors. When large volatility events happen, many clients reappraise their relationship with their asset manager. Whether they are spooked about risk levels or asset allocation, major market events often trigger investors to scrutinise their incumbent manager(s). While often overlooked, strong communications can play an important role in helping alleviate clients’ concerns and increase retention. It’s critical that asset managers share timely information and updates with their clients about how the firm is managing a crisis and what the anticipated impact will be to their portfolios. Clients often change their mandates not due to poor performance, but because of poor communications or a breakdown in relationships.

The global pandemic and resulting market volatility have accelerated trends already in motion, as more asset managers migrated to the cloud and engaged with an outsourced services partner. Looking towards 2021, asset managers will continue to invest in these two areas to strengthen their system integrity and maintain operational resilience. While we cannot entirely predict how geopolitical matters may shake out, what we can say is that preparedness will be critical to firms’ success.

Interested in more insights on how asset managers are managing their data sets, systems, and hosting decision? Read our recently released research here.

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