Investment industry should consider '10 things' post-crisis
UK - The Research Foundation of CFA Institute has published a list of 10 things the investment management industry ought to consider in the aftermath of the financial crisis.
The institute's monograph compiles a series of conversations with industry heavyweights and academics in a single volume that addresses the "lessons to be learned and changes that need to be made" to improve the industry.
Sergio Focardi, co-author of the monograph and professor of finance at the EDHEC Business School, said: "Everyone in the industry will need more 'science', a more systematic consideration of the true risks that lie ahead, be they the risk of extreme events, liquidity risk, counterparty risk or systemic risk.
"At the same time, investors are asking for more transparency in products and processes and are increasingly reluctant to pay high fees for low returns. The industry needs to propose strategies and a fee structure more aligned with today's reality."
The institute's first recommendation is for investment companies to consider correlations at the "relevant time horizons".
"Instantaneous correlation between the returns of different assets and asset classes," it says, "does not fully reflect the behaviour of the returns of assets or asset classes in times of crisis, when there can be shifts in medium-term trends or an increase in correlation at long time horizons."
Companies should also review asset allocation more frequently.
"Today's markets experience more large swings in market valuations and change behaviour in fundamental ways that affect the forecasts of entire asset classes and require dynamic asset allocation," it adds.
"While dynamic asset allocation holds the promise of higher returns, it is a source of risk given that it shifts assets dynamically from entire asset classes, leaving little margin for mistakes in timing."
The institute also calls on investment companies to consider extreme events, as "they do occur more frequently than today's risk models forecast", consider the magnitude of losses "should one need to unwind positions rapidly" and consider the complexity of the "web of relationships" between agents and investment products.
For the full list of recommendations, download the monograph here for free.