Demand for risk overlay increasing amid rise of alts

There has been rising investor focus on integrating risk monitoring across traditional and alternative investments post-financial crisis, industry experts tell an AsianInvestor forum.
Demand for risk overlay increasing amid rise of alts

Increased allocations to alternatives are leading to more focus on integrating risk monitoring across traditional and alternative investments, a forum heard.

As a result of the effects of the global financial crisis, an increased focus on compliance from clients had meant some asset managers were leaning into strategic opportunities such as real estate.

But the rise of liquid alternative investment products was highlighted as a risk that may reduce investors’ incentives to carry out proper due diligence.

The expert panel was discussing alternatives at AsianInvestor's 2nd Women in Asset Management forum in Hong Kong last week.

As asset owners look more holistically at their portfolio allocations they were beginning to integrate alternative and traditional investments. “The forward challenge is risk management," said Debra Ng, Singapore-based head of portfolio and client group at Albourne Partners.

Investors' views of how to implement risk management were changing, agreed Vanessa Wang, Asia Pacific head of pensions at Citi Markets and Securities Services. “A risk overlay approach has become prevalent,” said Wang. She added that investors were looking more at risk allocation than allocating between asset classes.

“Clients demanding attention from our solutions business can be a combination of traditional and alternatives,” said Lindsay Wright, Invesco's Asia-Pacific head of institutional, alternatives and investment solutions.

Wright added that the increased focus on compliance and risk post-financial crisis had seen Invesco “lean into strategic opportunities, driven by demand from clients”. In Invesco’s case that meant boosting the firm’s real estate capabilities as well as bringing its Wilbur Ross private equity and PowerShares ETF offerings to the region.

Wright said that there was an increased burden around regulation but at the same time opportunities in the region were opening up with deregulation. Citi’s Wang pointed to regulations changing clients’ demands. Capital charges for insurance companies were, for example, “driving asset changes”.

Rachel Farrell, JP Morgan Asset Management’s Asia head of sovereign and institutional strategy, suggested that the financial crisis had highlighted the advantages of being large and contrarian, and confirmed "a tremendous amount of interest" in alternatives among the firm’s institutional client base right now”.

The rise of alternatives was also reflected among the audience members, over half of whom were involved in alternative investments, according to a poll conducted during the forum.

Albourne’s Ng said that the financial crisis had been “good for our business”, given clients’ increased demand for due diligence. She was concerned, though, that the rise of liquid alternative investment products may reduce investors’ incentives to carry out proper due diligence, relying instead on the structure providing protection against risk. “A blow-up or a severe disappointment could have a larger implication for the industry as whole,” she warned.

The impact of automation and digitisation was another trend in focus. “Where we are going on digital is taxing everyone,” said Wright. Gearing up to capture opportunities has seen increased investment in distribution, product and back office systems, she said.

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