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The ability to align, differentiate, and activate authentic alpha generation capabilities through better alignment between ex-ante decisions and ex-post performance is critical, but there is a broad gamut of enhanced capabilities which investment firms can pursue.

A total portfolio approach, where the ex-ante analysis of risk and sustainability are tested and validated by ex-post monitoring, requires both a strong focus on the quality of risk analytics and, more importantly, the ability to have an integrated portfolio and risk management solution supporting a risk-aware investment process.

This requires a robust and fully integrated process, supported by a proven approach to risk mitigation and, at the same time, able to provide clear and transparent reporting to clients on investment strategies and port¬folio management decisions.

Portfolio and risk managers usually face challenges of disparate information systems, which create operational limitations that directly influence the returns they could generate. Organisations that proactively manage risk are more risk-aware and be¬tter at tailoring risk to get a higher return on their portfolios.

Finding a real integrated solution for Risk Management

But how to recognise a true End-to-End Risk-Aware Investment Management solution?

First, by a Risk Data Quality service able to take the Risk & ESG factors as input, and then perform a daily validation and revision of risk data to ensure that all calculated analytics are robust and reliable, managing exceptions and taking corrective actions.

Then, you need a Risk Engine that calculates risk analytics ensuring a comprehensive approach to identify the correct level of risk, together with specific client characteristics such as time horizon, cash flow and objectives.

Finally, with a Portfolio Management tool for asset allocation to build optimised, sustainable and suitable port¬folios on risk factors, asset classes and securities selection, in line with risk profiles and target markets.

Selecting a functionally-rich risk engine

When selecting a risk engine, a performing solution should include a wide set of metrics. Users should be able to define their own risk criteria according to their business model calculated on single assets, asset classes or the entire portfolio, providing information on potential losses, correlation among securities and dispersion measures, related to different risk categories, such as market, credit and liquidity risks.

The calculation engine should provide ex-ante risk measures to analyse portfolio risks for customer relationship managers, portfolio and risk managers, for them to monitor single positions or portfolios as a whole, to simulate the potential impact of different investment decisions and support portfolio risk calculations from a regulatory perspective.

Five pillars for a risk-aware, integrated investment process

When evaluating a solution to provide a solid approach to risk and portfolio management decisions, these are the fundamental characteristics to tick:

  • It guarantees the data quality 24/7, ensuring that the resulting analytics are robust, reliable, validated and harmonised.
  • Performs a risk contribution and correlation analysis, to monitor the contribution of each portfolio linked to the overall risk.
  • Ensures that investment proposals are personalised and tested against compliance rules and clients’ constraints.
  • Aligns end-to-end processes between trading/investment, risk and product control.
  • Manages exceptions and takes corrective actions.