Managing Portfolio Risk and Market Volatility

Market Dislocation: Reviewing the first line of defence

Institutional investors across the globe have navigated the coronavirus-related market volatility in a myriad of different ways. Many portfolios have required some form of rebalancing, additional diversification or tactical hedging. How have these changes to portfolio construction performed? Are there any specific risk factors or historical trends that investors could have considered when appointing their first line of defence?

In this blog post, Savvy Investor has collated papers on the considerations and opportunities for risk management during highly volatile periods of market dislocation. Several papers also assess historical data to provide insights into past performance and trends. A look at the role of hedge funds during periods of crisis may be of particular interest, as well as a deeper dive into behaviour patterns of the VIX during various market conditions.

Volatility Study 2020 (State Street)

Sponsored by State Street, this survey of senior executives from across the finance industry presents findings on how institutions are managing investment allocations and operations despite the coronavirus-related market volatility.

Diversification Potential: Untapped alpha in non-US equities (Intech, Jun 2020)

For compliance reasons, this paper is only accessible in certain geographies

Market-cap weighted indexes, even those with a large number of constituents or stocks from many countries, aren’t as diversified as they seem, argues Intech. In this recent paper, they introduce a new statistical measure – ‘diversification potential' to advocate for a frequently overlooked alpha source.

Market Risk Insights: Portfolio triage (Federated Hermes, 2020)

For compliance reasons, this paper is only accessible in certain geographies

When seeking to navigate volatility and market sell-offs, Federated Hermes argues that an assessment of the major risks can help during times like these. They provide analysis on ESG, correlation, events, liquidity, volatility and stretch.

Cinderella Science? Portfolio construction holds the key (Aviva blog, Jun 2020)

For compliance reasons, this paper is only accessible in certain geographies

Portfolio construction, according to Aviva, is crucial for success during volatile times. In this paper, they explain the difference between effective and ineffective portfolio construction techniques and outline the factors to consider.

A Case for Multi Strategy (Janus Henderson Investors)

For compliance reasons, this paper is only accessible in the United States and Canada

Have hedge funds delivered or failed during COVID-19 volatility? David Elms and Suny Park from Janus Henderson look at why many haven't had hedging success and consider the benefits of employing protection strategies.

Rethinking Risk and Rebalancing Portfolios (BlackRock blog, Jun 2020)

For compliance reasons, this paper is only accessible in the United States and Canada

The team at BlackRock assesses the performance of risk models in today's volatile market backdrop. They outline opportunities for portfolio rebalancing and consider how private market assets can be useful for portfolio risk management.

Hedge Funds and Economic Crises (AllAboutAlpha, 2020)

By comparing 2008's crisis with the 2020 coronavirus crisis, this study provides analysis on the performance of hedge funds and the role they play in markets during volatile times. Can hedge funds offer essential downside protection?

The Vix, Vol-Based Global Indexes and Trading Instruments (CFA Institute Research Foundation, 2020)

In this guide, CFA Institute Research Foundation answers a range of questions frequently asked by investors on the VIX and other related products. In particular, the paper assesses product behaviour across multiple market conditions and environments.

Markets Scenarios & Risks (Amundi blog, Jun 2020)

For compliance reasons, this paper is NOT accessible in the United States

In their assessment of risks and market scenarios, Amundi argues for a rise in financial and geopolitical risks. Though a second coronavirus wave is possible, they are encouraged by countries in Asia who have controlled new clusters.

Portfolio Positioning for a Recovery Scenario (Invesco, May 2020)

For compliance reasons, this paper is only accessible in the United States

Invesco reviews historical data from the last forty years and provide an assessment of performance trends typical in post-crisis markets. They examine patterns in cap size, asset allocation, regions, style and sectors.

U.S. DB Plans: Credit outlook and rebalancing (Wellington Management, May 2020)

LDI experts from Wellington Management answer topical questions for US corporate defined benefit pension plans. They outline considerations for rebalancing, funded ratios, liability hedging and liquidity as well as their market outlook.

Podcast: Do you have the equity protection you need? (BNP Paribas AM, Jun 2020)

In this podcast, BNP Paribas' Daniel Morris and Julien Halfon outline the challenges faced by institutional investors in navigating 2020's volatile markets. They examine the risks of equity investing and discuss risk overlays.

Debt De-Risking (BIS, 2020)

BIS assesses de-risking in fixed income funds and examines how portfolio risk can be manipulated. Their results find that costs can be reduced by debt de-risking but also raise several other outcomes for investors to consider.

Functional PCA for Implied Volatility Surface Prediction (MetLife IM, 2020)

MetLife Investment Managers present results from a comparative study on the implied volatility surfaces of multiple foreign exchange currencies. They suggest why combining modelling and analysis to predict implied volatility outperforms.