Risk management
Systematic approaches such as market-neutral and directional strategies can provide uncorrelation to traditional markets through all market scenarios. Given today’s increased market volatility, systematic hedging and diversifying paths can be even more relevant for institutional investors to help protect their overall investment portfolio —and can also deliver upside potential, according to this quantitative asset manager.
As asset owners continue to embrace sustainable investing, its definition and applications are broadening and they are taking highly differentiated approaches to access investable themes such as the energy transition, biodiversity and stewardship. While climate risk mitigation and renewable energy are top themes, data availability and benchmarking have become more granular. Investors are also taking a holistic view of their investments in terms of comparative long-term governance and economic development trends.
How are investors positioning their fixed-income allocations for a higher-for-longer rate scenario? Or, for that matter, for an unexpected rate surprise? They are focused on shorter duration and high-quality assets, with several segments offering attractive returns including investment grade credits. Investors are also seeking highly customized solutions that can meet their precise objectives of diversification, income or liability-matching.
What should an overfunded corporate pension plan do with its excess assets? With many DB plans in this enviable position, thanks to robust markets and successful liability-driven investment strategies, an array of paths have opened up. They include reopening closed or frozen plans, supporting an acquisition, covering permitted administration costs as well as doing nothing at all.
With corporate pension plans in the enviable position of full funded – and even overfunded – status, they are derisking to protect their gains and manage the surplus, depending on their plan objective. A host of LDI enhancements have opened up to improve cashflow matching and tighter hedging, while many plans are also pursuing overall diversification. Also in favor are a total plan performance approach, customized benchmarks, pension risk transfers and more.
Institutional allocators are paying close attention to the impacts of climate change, from extreme weather events to accelerating loss of biodiversity, on their investment portfolios. While the focus on returns remains central, investors can choose from several approaches to activate their portfolio around sustainable themes. Greater intentionality in terms of alpha generation and risk management across sustainable themes, particularly the climate transition, is evident.
Institutional investors should have an exposure to value in their portfolio, keeping their risk tolerance and time horizon in mind, in order to access the value premium over the long term. A consistent and fundamental bottom-up analysis is needed to achieve it, via an asset manager that can deliver results across market cycles.
Institutional investors should look beyond the promise of AI to examine their asset managers’ experience, execution and usage of AI for alpha generation. As a quant manager that has long incorporated AI explains, a scientific approach and collaboration between the technology and research teams are essential for delivering the value of AI for asset managers and their institutional clients.
The transition to renewable energy from fossil fuels — likened to the Industrial Revolutions — will entail massive reallocations of capital and presents tremendous prospects that can provide robust, long-term risk-adjusted returns. As the world moves toward net zero, institutional investors are finding a broad range of opportunities across the energy value chain, in a diversity of sectors, industries and regions.
