Derivatives and Investment Risk Solutions for the Buy Side

Optimizing the Risk-Return Equation
by Cubillas Ding,  Sreekrishna Sankar, December 15, 2011
Product Trends/ Reviews
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Protracted uncertainty in markets and asset prices have pushed investment risk management to the forefront. Buy side firms are looking to strengthen risk frameworks and systems to withstand future market turbulence. The need for a robust investment risk management system is critical to enable firms to achieve new levels of efficacy.

Structural market, regulatory, and business trends are now placing direct demands on firms to strengthen operational and technology underpinnings. Buy side firms looking to achieve best practices in investment risk management must adopt a highly cohesive approach to integrating investment risk management processes strategically into a firm’s portfolio construction, trading, and enterprise risk architecture.

In this report, Derivatives and Investment Risk Solutions for the Buy Side, Celent finds that crisis conditions, systemic disruptions, and regulatory changes (coupled with falling returns in traditional equities) have changed the long-term dynamics for buy side firms. Of more immediate importance to the financial markets is that many long-term investors have derisked their portfolios in response to regulatory and accounting changes, including a move towards mark-to-market accounting and stricter capital requirements, as well as a lower institutional tolerance for risk. This shift has led many institutions to increase their buffers of liquid investments—with some institutions shunning illiquid investments altogether and reducing the capital allocated to risky and volatile assets. At the same time, as investors are differentiating between alpha and beta, managers are forced to demonstrate positive alpha in uncertain markets, resulting in more firms utilizing derivative strategies to enhance investment returns.

“There is a clear focus on enabling and enhancing risk systems to measure and monitor market, counterparty, liquidity, and credit risk on a total portfolio basis,” says Cubillas Ding, Research Director at Celent and coauthor of the report. “The ability to monitor all exposures will allow firms to respond swiftly to any form of counterparty credit deterioration, while various functionalities such as liquidity risk management capability and a comprehensive set of risk analytics and attribution will provide firms with the ability to understand their liquidity risk and firmwide exposures at all times.”

“Front-to-back solutions, which can cover all departments across the investment risk management life-cycle, tend to be limited in their risk analytics capability. They often lack multifactor modeling capability, and, even if multifactor modeling is present, most solutions will only offer prespecified/structural models,” adds Sreekrishna Sankar, Analyst with Celent’s Indian Financial Services group and coauthor of the report. “By comparison, stand-alone investment risk systems allow for more flexibility and robust modelling capability, because users are able to make use of techniques of statistical modeling that allow for the estimation of systematic components obtained directly from historical data.”

As part of this study, Celent evaluated six vendors of investment risk systems, including Algorithmics, Calypso, Misys Sophis, MSCI RiskMetrics, Murex, and SunGard APT. Vendor solutions are ranked using Celent's ABCD Vendor View, which show the relative positions of each vendor along multiple dimensions: Advanced Technology, Breadth of Functionality, Customer Base, and Depth of Client Services.

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

3

Business and Technology Trends

5

 

Structural Market, Regulatory, and Business Trends …

5

 

… Place Demands on Firms to Strengthen Operational and Technical Underpinnings

6

Celent ABCD Analysis

10

 

Vendor Ranking

12

 

ABCD Ranking at a Glance

14

 

Advanced Technology/Features

14

 

Breadth of Functionality

16

 

Client Base

17

 

Depth of Client Services

17

Vendor Profiles and Solutions Evaluations

18

Algorithmics

18

Calypso

22

MSCI / RiskMetrics

28

Misys

33

Murex

38

SunGard

44

Vendor Comparison

48

Looking Forward

57

Leveraging Celent’s Expertise

59

 

Support for Financial Institutions

59

 

Support for Vendors

59

Related Celent Research

60

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