A new research report from Greenwich Associates finds that the buy side is quickly embracing third-party risk management offerings.
Kevin McPartland, head of market structure and technology research, Greenwich Associates
Buy-side firms have jump started their investments in risk and analytics platforms, spending $700 million on “risk tech” during 2017 and marking a major move away from internally developed systems, according to a new survey done by Greenwich Associates, a market research firm.
In fact, buy-side “expenditures nearly doubled to 10 percent of total buy-side trading desk technology budgets in 2017,” according to the researchers
“Buy-side portfolio and risk managers today are motivated by risk tools that allow them to explore investment opportunities in emerging markets and new asset classes, as volatility and rising interest rates finally return,” says Kevin McPartland, head of Greenwich Associates market structure and technology research, in a prepared statement. He is the author of a new report, “Developments in Buy-Side Risk Technology.”
The new report presents the complete results of a recent study in which Greenwich Associates interviewed 54 institutional investors in the U.S. and Europe about their use of risk management technology.
Third-party risk analytics platforms are offered to institutional investor firms to help them gauge and model the effects of several variables — market, portfolio, credit, interest-rate, volatility, liquidity, counterparty, and operational risk — on their portfolios.
“However, risk management platforms, whether built internally or bought off the shelf, have been difficult for investment managers to expand into new markets and new products,” according to Greenwich Associates. Survey respondents report that commercially available risk technology has been on an upward path as far as improvements in the levels of flexibility and functionality.
“As such, the study found that the buy side is increasingly making the move to third-party platforms and away from internally built systems for their risk-management needs,” according to Greenwich. “These off-the-shelf solutions are seen as more cost effective in the long run. Further, more than half the study participants utilizing outside solutions found them to be easier to integrate with other platforms both up and downstream.”
Greenwich Associates interviewed 54 asset managers, hedge funds, pension funds, and insurance companies during the first quarter of this year about their use of risk management technology. “The analysis, which includes responses from portfolio managers, risk managers, traders, and quantitative analysts, examines current platforms used, concerns with those platforms, demands for new functionality, and drivers for change in the coming year,” researchers found.
“Institutional investors aren’t in the investing business — they’re in the risk business,” according to the executive summary provided by Greenwich. “Generating investment returns is increasingly less about picking the right security and more about managing the risk/reward profile of the portfolio over time. Risk management is not, of course, an exact science, as its ultimate goal is to predict the future. And just as every artist has their preferred medium, every portfolio manager and risk analyst also has their own distinct ways of modeling risk.
Past risk management platforms, “whether built internally by the investment firm or bought off the shelf,” had a singular focus in mind. “This has made it hard for investment managers to expand into new markets and new products, as current systems are often insufficient to fully evaluate if the risk is worth the potential reward,” according to Greenwich.
“That era is ending, however, as commercially available risk technology now provides an amazing level of flexibility that ensures one firm’s implementation looks nothing like the firm’s across the street,” according to Greenwich. “Institutional investors are coming to grips with the size of the opportunity these innovations can offer, and they are spending to ensure they can capture it.”
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