Buy Side Investment and Risk Management: Thriving in Alternative, Multiasset Realities

by Cubillas Ding,  Dennis Kong, October 20, 2015
Industry Trends
EMEA, North America

Abstract

Celent provides perspectives for financial firms and technology providers to find better ways to thrive in the realities of alternative investing and multiasset trading, and offers recommendations on best practices for investment risk operations and technology.

In the report Buy Side Investment and Risk Management: Thriving in Alternative, Multiasset Realities, Celent explores developments, trends, and dynamics in the buy side universe, their implications on investment and risk functions, and how firms should respond.

Since the last financial crisis, asset management firms have continued to adapt to its fallout, emphasizing multiasset, diversification, and income as mantras. At the same time, with continued uncertainties around interest rates and currencies, stalling emerging markets growth, and deflating asset bubbles, the investment universe is pushing and pulling in different directions driven by structural shifts, product trends, and investment dynamics.

Supply and demand factors are expanding the investment universe and raising operational complexity. Investors are requiring more from their asset managers, not just products and advice but end-to-end solutions. With heightened pressures from investors, existing products continue to evolve, and investment approaches require more sophistication (e.g., smart beta), but investors are also finding new uses for existing products (e.g., ETFs to substitute for derivatives).

The broader market environment continues to see intense regulatory headwinds, exacerbating operational friction for the buy side. Furthermore, continued growth in both operational and investment outsourcing is creating interesting cross-over dynamics that need to be orchestrated from a risk management and risk reporting standpoint.

“Exogenous banking, insurance, and derivatives market regulations are increasing capital requirements for different constituents,” says Cubillas Ding, a research director with Celent’s Securities & Investments practice and coauthor of the report. “These in turn are altering the economics of suppliers and clients of buy side firms, as well as upping operating complexity and costs.”

Looking forward, structural anomalies and economic uncertainties are pushing investors and asset managers even further towards new horizons in the investment universe. Buy side firms will need to remodel their business operations and technology infrastructures to ensure that they are fit for purpose.

“This universe is not remaining static. In charting towards new frontiers, black holes are abound; new regulatory forces are emerging, and embryonic ‘star’ opportunities are coming to light,” says Dennis Kong, an analyst with Celent’s Securities & Investments practice and coauthor of the report. “Firms must prepare for these new realities.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

 

Key Research Questions

1

Introduction

3

 

Key Research Questions

3

Evolving Realities in the Buy Side Universe

4

 

Multiasset Class Investing Expands

4

 

Regulations Continue to Exacerbate Operational Friction

6

 

Concerns over Market Liquidity

7

 

Increased Scrutiny and Transparency into Alpha and Beta Constituents

8

 

Factor Investing and Smart Beta

9

 

Painful Migration from Bilateral to Cleared Derivatives Markets

10

 

Streamlined Frontline Infrastructure to Sharpen Investment and Risk Decisions

12

 

Outsourcing and Cloud Technologies to Achieve “At Scale” Operational Efficiencies

13

 

Investment Outsourcing Gains Ground

14

 

An Emerging Battleground for Solution-Oriented Mandates

15

Implications for Investment and Risk Management

17

 

Data Enablement Strategies

17

 

Risk Management Capabilities

22

 

Outsourcing and Insourcing Considerations

27

Conclusion

31

Leveraging Celent’s Expertise

32

 

Support for Financial Institutions

32

 

Support for Vendors

32

Related Celent Research

33

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