Clearwater Analytics: Increase in stress-testing to identify hidden risks
Almost nine out of 10 (88%) of 250 senior executives at fund managers across the U.S., Europe and the Asia-Pacific region have increased expenditure on stress testing funds in the past year as they respond to challenging market conditions, a comprehensive global study commissioned by Clearwater Analytics reveals.
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.
When asked how they will tryto 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.
Asset managers also face growing concern that traditional diversification strategies may offer less protection during extreme market events as correlations between asset classes rise under stress conditions.
In response, 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 a third (34%) of survey respondents say they will use volatility products such asbuying 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.