Nearly 88% of asset managers have increased spending on stress testing to identify hidden risk exposure amid rising interest rates, reduced market liquidity, and geopolitical instability. These investments help fund managers evaluate portfolio behavior during market downturns and make more informed risk management decisions.
- 88% of asset managers across the US, Europe, and Asia-Pacific increased stress-testing expenditure in the past year
- 49% plan to use enhanced quantitative risk modeling or stress testing to identify market risk exposure
- 56% will implement protective puts (buying options on major indices) to guarantee payouts if markets fall below strike prices
- 54% will increase focus on defensive stocks with lower market sensitivity and strong balance sheets
- Key drivers: higher volatility, reduced dealer balance sheet capacity, and greater geopolitical uncertainty challenging traditional risk assumptions
Almost nine out of 10 (88%) senior executives at fund managers across the United States, Europe and the Asia-Pacific region have increased expenditure on stress testing funds in the past year as they respond to challenging market conditions, according to "The Crowded Trade", commissioned by Clearwater Analytics.
The perfect storm of rising interest rates, restricted market liquidity and geopolitical instability are increasing the risk of sudden and disorderly market dislocations, particularly during periods of heightened volatility.
“Traditional risk assumptions are being challenged by a combination of higher volatility, reduced dealer balance sheet capacity and greater geopolitical uncertainty. It is no surprise that asset managers are turning to stress testing and scenario modelling because they want faster access to accurate, consolidated investment data to better evaluate how portfolios may behave during left-tail events and make more informed risk management decisions,” says Kirat Singh, president of risk and alternative assets at Clearwater Analytics.
Key takeaways:
· When asked how they will try to reduce the risk of severe “left-tail” portfolio losses over the next 12 months, just under half (49%) of asset managers surveyed say they will employ enhanced quantitative risk modelling or stress testing to identify where they are exposed to market risk.
· More than half (54%) of asset managers say they will increase their focus on defensive stocks with less sensitivity to market moves and strong balance sheets, which historically suffer less severe drawdowns.
· Further, 56% of asset managers say they will put protective puts in place, which means 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 one-third (34%) of survey respondents say they will use volatility products such as buying call options or futures on the CBOE Volatility Index, which gain value as equities fall, to mitigate severe losses.
· Just under a quarter (22%) of research participants will allocate to tail risk funds in the next 12 months, and 16% will invest in real assets, which are widely considered to be safe havens.
