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Core Risk Strategy Moves for Asset Owners and Managers

Risk, Performance, and Reporting

By FactSet Insight  |  April 20, 2021

No one could have foreseen the degree to which COVID-19 would disrupt lives, economies, and markets worldwide—or could we have? And how can risk managers hope to hedge against future black swan events, those highly rare, high-impact, and widespread occurrences that shake up global markets and are only obvious in hindsight?

In FactSet’s latest research with Forbes Insights, we investigated how prepared asset, endowment, pension, insurance, and similar investment managers were for a pandemic on the scale of COVID-19. How agile, creative, and successful were global executives and their firms in crafting their response to a crisis that was—and is—disrupting lives, economies, and markets worldwide? What strategies, technology, and tools contributed to positive results—and what hindered performance? For added context, we interviewed FactSet thought leaders Robert Robie, EVP of analytics and trading, and Dr. Boryana Racheva-Iotova, SVP and senior director of research, risk, and quantitative analytics.

Previously we explored three different ways asset managers and owners can strengthen their stress testing to better prepare for black swan and fat-tail events. Here we’ll examine the growing need for changes to core risk strategies that would enable risk managers to pivot when faced with such volatility.

The Industry Was Unprepared for the COVID-19 Crisis

Over half of the 101 asset owners and managers responding to our survey said their firms were unprepared for the market impacts of COVID-19. Almost one-third went so far as to say that their firms were wholly unprepared for the crisis. Only 42% said their firm’s risk management strategies and tools performed well during the pandemic. Nearly half, 46%, suffered significant losses with 8% experiencing losses of over 25%.

What hindered performance during the outbreak? As stated earlier, the most frequently cited factors included a lack of early warning signs within risk analytics as well as a lack of collaboration between risk and those involved in investment decisions. Also cited was a lack of collaboration between external business and technology partners. All three weighed in at 51%, showing that performance obstacles were varied and cannot be attributed to one overarching factor.

More than a third of executives, 38%, viewed the crisis as unforeseeable, and Racheva-Iotova agrees. Before the pandemic, she had been actively researching fat-tail risk and the predictability of extreme events that have a low probability of occurrence.

In terms of this pandemic, the speed at which it swept over the globe meant no one could have predicted its impact.

“While a severe pandemic could be the object of scenario planning against fat-tail risks, every such event has at least two dimensions to consider when it comes to predictability: the possibility of occurrence of the event itself and the timing. In terms of this pandemic, the speed at which it swept over the globe meant no one could have predicted its impact,” says Racheva-Iotova.

There is a growing need for changes in core risk management strategies that would enable risk managers to effectively pivot should such events happen again in the future. This seems to be the consensus for risk leaders with nine out of ten executives admitting the pandemic has forced them to rethink their fundamental risk management strategies and 54% already making changes in response to lessons learned.

When asked where they foresaw the greatest investment opportunities going forward, one respondent noted, “Use of cognitive analytics and big data for automation of processes and also to identify potential risks.” Another replied, “Data collection and integration tools, cloud software, and data analysis technologies.” A third responded, “Diversifying the product and services portfolio across different geographies.”

Based on the survey and insights from Racheva-Iotova, here are four key strategy adjustments to consider as we move forward.

1. Invest in Data-Driven Risk Analysis

The first adjustment is to expand the universe of potential risk factors and, more specifically, to add a wide range of nonfinancial measures. When analyzing the organizations that are making adjustments to their risk models, 50% are turning to more holistic analysis, 32% are accessing more and better data, 32% are adjusting the definitions and mix of dynamic versus static factors, and 29% are replacing their model entirely.

The survey finds that 23% of firms adjusting their risk management strategies are accessing alternative/expanded data sets and 28% are pursuing a greater use of quantamental analysis. Meanwhile, the majority of responses indicate a drive to invest in risk management technology with the three most popular being the implementation of artificial intelligence and machine learning tools (80%), the implementation of a data cloud (78%), and the improvement of data collection and management (76%), all of which would enable the expansion of data-driven risk analysis.

Significant percentages of executives say a range of customized risk modeling elements is becoming more critical to their risk analysis based on their experience with COVID-19.

Diving deeper still, significant percentages of executives say a range of customized risk modeling elements is becoming more critical to their risk analysis based on their experience with COVID-19. These include developing customized distribution assumptions (51%), simulation parameters (49%), customized factors (46%), and risk models (39%).

“By helping clients expand their data sets and the universe of risk factors,” says Racheva-Iotova, “their risk management monitors issues such as a deglobalization, political and social risks, climate impact, ESG [environmental, social, and governance], and so forth.”

When asked to indicate which decomposing drivers of portfolio risk were critical before the pandemic and which will remain, there were interesting changes in terms of rank. Macro risk went from top of the board to the bottom, while alternative asset modeling and risk factors and political risk factors moved to the top along with ESG risk factors.

Similarly, when comparing the critical elements of portfolio risk measurement before and after COVID-19, although all continue to be critical, the priority shows a shift with liquidity, credit, and long-horizon portfolio risk moving to the top of the list.

2. Construct Flexible Models and Analysis

The survey also indicates that firms need to pay closer attention to strategic asset allocation and asset/liability management.

When looking at portfolio construction elements, these are viewed as almost equally critical across asset allocation and asset liability management (53%), multi-asset class optimization (51%), and portfolio optimization (51%) going forward.

“Particularly on the short horizon side, there were significant changes in the betas of stocks during the pandemic,” says Racheva-Iotova.

Much of this shift was driven by the chaos that erupted in global supply chains. Correlations imploded with most risk management and investment systems being unable to detect and update to new realities in time to determine the needed course corrections.

The challenge going forward is building models that are flexible enough to capture short-term dislocations on the market.

So, the challenge going forward, says Racheva-Iotova, “is building models that are flexible enough—that self-adjust very quickly—to capture such short-term dislocations on the market.”

“Many think COVID-19 played as training for the future where more non-financial risk could become severe—political, climate, technology breakthroughs—which can reshape the financial profiles of assets and markets dramatically. With that in mind, long-term strategic asset-allocation and asset liability management should be enhanced to capture such risks, and possess the necessary flexibility regarding risk-drivers, expectation scenarios, changing dependencies and exposures, and time-varying investment risk-return profiles,” she adds.

The most frequently cited analysis and modeling that firms have found useful and effective amid the COVID-19 crisis include stress testing and scenario analysis (71%), custom risk modeling (67%), and long-horizon modeling or multi-asset class analysis (i.e., decomposing drivers of portfolio risk) (65%).

3. Pay Closer Attention to Derivatives

A third much-needed strategy adjustment is to enhance risk management practices around the use of derivatives. According to Racheva-Iotova, many firms stumbled in this area during the pandemic, as it was precedented by a relatively low volatility. Models that were able to spot turbulence in low-vol markets were helpful to serve as an early warning. Other players that relied on historical type risk models that had short-vol exposures found it hard to rebalance or exit quickly.

A key approach here, says Racheva-Iotova, “will be to focus more on full-repricing models where all the non-linearities and tail dependencies are captured more completely.” Racheva-Iotova also recommends enhancing stress testing—an initiative underway at 33% of firms adjusting their risk strategies.

4. Adopt Holistic Strategies and Processes

Finally, the survey data shows that firms need to do more to manage their risks holistically. In fact, the lack of a holistic approach to risk management was cited by 37% of respondents as a significant performance inhibitor during the pandemic.

79% of executives agree that the COVID-19 crisis has accelerated the need for a more holistic approach.

Risk managers and asset managers should be working closely together, ultimately benefiting from one another’s expertise and insight. Seventy-nine percent of executives agree that the COVID-19 crisis has accelerated the need for a more holistic approach, and this plays out even further in the data. Pre-Covid, 60% of executives said their firm’s risk management was disaggregated, but by the end of 2021, 96% said they expect their risk management to be fully holistic.


Overall, the survey highlights that prior to COVID-19, many firms were already building stronger risk management with most in the early, but some in the advanced stages of taking all or some of the preceding steps. But the entire marketplace needs to be even more aggressive. It’s critical for firms to be prepared with their data, modeling, and ultimately their core risk management strategies.

Other articles in the series:

Three Ways Asset Managers and Owners Can Strengthen Their Stress Testing

Three Ways the Pandemic is Shifting Risk Technology

COVID-19 Risk eBook