The asset management community is bullish on risk management investments as approximately three-quarters of buy-side firms look to evaluate or implement new risk platforms in the next 12 months, according to recent research from Greenwich Associates.
Although overall technology spending by asset managers have been relatively flat for the past few years, spending on the risk management has grown, Kevin McPartland, managing director, market structure and technology at Greenwich Associates, told Markets Media.
“We were surprised at the increase in spending we found,” he said.
The buy side spent an estimated $692 million annually on risk, which represented 6% of its overall IT spending in 2017, McPartland wrote in a recently published study. Greenwich predicted that that would increase to approximately $700 million, or roughly 10% of overall spending, in 2018.
McPartland attributed the rise in spending to a sea change amongst asset managers.
“Right after the financial crisis, spending was cut everywhere except for risk management,” he said. “Here we are ten years later, and the jump in risk spending is not about fixing what broke during the crisis. It is about increasing returns and getting into new markets.”
If the previous spending on risk was defensive then its offensive now, he added.
The search for better yield has led institutional investors to incorporate instruments that they have not used in the past into their portfolios, such as structured credit vehicles.
“To do that safely is to have the ability to model the risk and make sure that you are taking on the appropriate amount of risk for the risk that you are chasing,” said McPartland.
Where and how the buy side plans to invest in their risk infrastructure remains a broad spectrum of approaches, but he noted a steady march towards third-party systems.
“Unlike EMS and OMS platforms a decade ago, when you bought it you bought the same thing as your competitor across the street, risk platforms are so customizable that one implementation does not look like the rest of them,” said McPartland.
He also noted that asset managers are driving towards adopting standard platforms across their businesses to obtains a business-level view of their risk exposure.
“Firms will always have their star portfolio managers who need the tools they need to do what they do so firms will make exceptions,” said McPartland. “Generally speaking, asset managers are trying to standardize and get away from that.”