The adoption of new trading strategies and investment in technology offer the greatest opportunities for asset management in the face of volatility and unpredictable developments, according to a the first of a quarterly asset management network report from Acuiti.
In light of rising interest rates, price volatility, failures in the US regional banking market, increased margin calls and risk management challenges in the face of global volatility, the inaugural Asset Management Insight Report, which will be updated quarterly, suggests these ongoing unpredictable market shifts have led to reviews of asset allocation and trading strategies, as well as an increased focus on risk and collateral management.
Acuiti managing director Will Mitting said the past decade has been challenging for traditional asset managers as regulation and costs have increased while competition from passive investment has also risen compressing revenues. “However, the report found that as volatility has returned to markets, the role of active managers has once again proved its worth,” Mitting said.
“The underlying challenges that firms face however in terms of rising costs and increased complexity of regulation is not going away. As a result, technology is playing an increasingly important role in increasing automation to reduce costs and increase efficiency, as well as building and launching new products in shorter timeframes to capitalise on the fast-changing demands of investors,” Mitting added.
On the wider derivatives markets, Mitting said: “These are interesting times for global derivatives markets as interest rate risks that have been dormant for 15 years have roared back to life. For market participants this creates opportunities but also requires a laser-sharp focus on risk management with the potential for losses as well as gains in strong market movements.”
As firms prepare for new regulations such as EMIR 3.0 and the move towards T+1 settlement, and many asset managers look to change how they position in markets, there is also a need for investment to support the systems needed to accommodate these as efficiently as possible.
Regulation was singled out as the second biggest challenge to growth, behind only rising cost bases, with the European Commission’s proposal for firms to hold an “active account” at European CCPs for their euro swaps business a particular headache. Exactly half of respondents said they are waiting until they receive further guidance from regulators before changing where they clear their swaps, with a lack of clarity cited as the biggest challenge to becoming EMIR 3.0 complaint by many respondents.
The Derivatives Trading Obligation that emerged under MiIFD II has also changed the pattern of execution for many firms and has led many to increase their use of electronic platforms for execution at the expense of voice execution.
Additionally, new trading strategies and investment trends, in particular the rise of thematic investing, have necessitated innovation in technology, the report outlined, with asset managers offered increasingly sophisticated products for strategies such as basket trading, which allow for high levels of customisation in index creation and greater speed in bringing products to market.
Asset managers are also turning to technology to automate processes and increase efficiencies in the wake of fee compression and falling margins.
While asset managers are investing in their technology stacks and feel well served across the front-, middle- and back office, two areas singled out for efficiency improvements are data and collateral management.
More than half of respondents are investing in data management to increase efficiency across their workflows. Regarding collateral management, while it’s believed tokenisation could potentially allow counterparties to access and transfer collateral at much greater speed than current processes allow, more than half felt that a finished product is still some way off.
When asked where they see the most opportunity for growth in profitability for their business over the next 12 months, respondents said that while new trading strategies and technology investment were key, trading new asset classes and reducing technology costs to improve margins were also important.
As well as rising cost bases and incoming regulation, asset managers also highlighted fee compression as a key challenge — a trend that can partly be linked to the ongoing popularity of passive investment products, the report suggested.
Despite more overall demand for passive products, a significant percentage of respondents (41%) believe that post-2020 volatility has seen more demand for active products.
Despite the volatility and shifting sands, or perhaps because of these factors, looking ahead, when asked how optimistic they were about their business over the next quarter, more than half (52%) of asset managers were “quite optimistic”, with only 14% “quite pessimistic”.
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