How Prepared Are Firms To Account For Risk?

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How Prepared Are Firms To Account For Risk?
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Sudden shifts in the investment landscape have proven extremely challenging for active investment managers who are already under pressure to improve their relative performance and adopt techniques to manage risk.

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Stress testing can be used to estimate not only the impact of macroeconomic and geopolitical scenarios on bond holdings, but also the potential effect on risk assets such as equities. Having already been widely adopted across the banking sector, the benefits of stress testing and risk analysis are for the most part acknowledged by investment managers. According to a survey conducted by FactSet in association with Risk.net, 87.5% of investment managers believe it is not feasible to accurately analyze performance without taking into account risk exposures.

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However, while one might expect investment firms to have embraced stress testing following dramatic falls across risk assets during the financial crisis, adoption appears to be slow. According to the survey, 52.5% of respondents described their firm’s capability to test theories on which quantitative and qualitative factors drive performance as either “very poor,” “poor,” or “fair.”

The delta between active manager’s acknowledgement that risk analysis is critical to accurate forecasting, and firm’s willingness to invest in it hint at deeper undercurrents regarding the identification and implementation of the best possible tools.

Read more about how active managers and firms view stress testing and their resource gaps in our exclusive eBook: The Financial Paradigm Shift.

Article by FactSet Insight

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