Why a single, real-time view is essential in volatile markets

Written by Fabien Feron Solution Consultant Investment Management Europe
Why a single, real-time view is essential in volatile markets

Extreme volatility
Volatility is at record highs. Triggered by panicked traders and program trading responding to the deteriorating economic outlook, the VIX volatility index spiked to over 80 in mid- March and remains 4x higher than its typical pre-2020 levels. Recent months have seen many other disturbing statistics. Between mid-February and mid-March, the STOXX Europe 600, S&P500, Nikkei 225 and FTSE 100 lost 25-35% of their value. Circuit breakers in the US activated four times in March, having only been previously used once since their creation in 1987. Short-selling bans have been applied in France, Italy and Spain – and many asset classes are showing signs of stress.

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The need for a faster, better portfolio view
Against this background, investment professionals managing long-term investments and relying on end-of-week or even end-of-month reporting are at a serious disadvantage. In Covid-19 and the investment management industry, Deloitte notes that driven by the pandemic, volatility is leading to daily changes in in asset valuation. The firm suggests that “some managers may need to consider how to reposition investment portfolios and reassure investors that the firm is managing through the volatility professionally in tighter time cycles.”

Deloitte goes on to suggest that decisions will need to be based on much more up-to-date information: “Even investment managers with long investment time horizons occasionally need to feed their investment decision processes with information that is refreshed faster than the timing of their standard process. Without fresh information, processed at the speed at which markets are moving, investment professionals could be operating sub-optimally—at a critical time.”

In practice, the inability to monitor risk in a timely manner makes it impossible to adjust hedges on strategies and portfolios, potentially leading to significant losses.

Long-standing demand for more granular and frequent risk assessments
The market has been demanding this real-time view for some time. In its 2018 report Next-Generation Portfolio and Investment Risk Capabilities Part 2, Celent found portfolio managers overwhelmingly challenged by the need for more granular and frequent risk reports and for more transparent, multi-asset class analytics: “Risk managers are expecting next-generation capabilities to call up both “live” and historical snapshots of aggregated information to (…) support investment managers with more timely risk analytics and decision support capabilities by providing improved aggregated portfolio-level insights and scenario-based analysis that can be decomposed into granular risk exposures, and how they influence fund performance and risk.”

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Multiple systems make a holistic view hard to get
Another of the barriers to an optimum overview of risk is that different asset classes often reside in different systems. The result is time-consuming effort – up to a day of work –extracting data from these systems to generate a holistic risk view. It is often carried out by highly experienced and well-paid staff whose expertise could be better deployed elsewhere in a time of crisis.

Celent’s report notes this issue in its report:  “… portfolio and risk managers are often challenged to align and reconcile information from disparate portfolio and risk systems, where the complexity of multiple systems and/or technologies poses significant hurdles to establishing stronger risk management and establishing greater transparency.”

The solution: real-time pricing and risk data across asset classes
To help investment firms manage today’s unprecedented uncertainty, Finastra’s Fusion Invest can deliver consistent analytics and risk figures in real time, across the firm from front to back office. It becomes possible to model, price and risk-manage the lifecycle of all investments, using timely analytics for both portfolios and benchmarks so firms can react fast to market changes.

And with greater risk transparency, firms can navigate crisis situations more effectively, monitoring and hedging risks across the firm and simulating decisions pre-trade. Up-to-date technology provides the capabilities needed. Fusion Invest’s modern technology stack, for example, drives innovation and allows analytics to be distributed via APIs to regulators, customers, internal staff and data lakes for better collaboration and control. The APIs also make it possible consume analytics via apps developed by investment staff, fintechs and partners, for portfolio optimization and sentiment analysis that drives investment decisions.

“Finastra have demonstrated a strong track record of staying at the cutting edge of investment trends and what the clients require; with a cohesive architectural vision, strong product roadmap, innovative approaches to solving existing problems, and successfully exploiting next-generation technologies and analytical techniques to enhance their portfolio and investment risk offerings.”
Celent, on awarding Fusion Invest the XCelent Advanced Technology and Analytics award

Mastering volatility: the opportunity in a crisis
Firms with real-time pricing and risk capability are better positioned to generate alpha, and their advanced levels of risk insight will reinforce trust with both customers and regulators. And more internal efficiency means effective collaboration and the focusing of talented resource where it’s needed.

It’s often said that crises create an opportunity to transform – to go back to the drawing board and rethink strategy for the better. As Deloitte says: “As the dust settles from Covid-19 and Q1 2020 market action, priorities can begin to shift to longer-term issues, such as modernizing the investment decision process.”

Investment in digital transformation and risk technology is a powerful way for firms to strengthen themselves for the post-pandemic future.

For more information on Fusion Invest, and how it can help you manage market volatility, contact us today.

Written by
Fabien Feron

Fabien Feron

Solution Consultant Investment Management Europe

Fabien Feron is a solution consultant at Finastra for its Investment Management solutions in Europe. With over 10 years’ experience in the financial services industry he specializes in risk management, performance attribution & compliance.

Prior to his current role he held project management...

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