Unleashing the Power of Effective Exposure Management for Asset Owners

August 16, 2023

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In the 1980s, asset owners such as pension funds, sovereign wealth funds, foundations, and insurance companies oversaw roughly $5 billion / ~€4.457 in assets in total. Today, the world’s largest asset owners alone account for $26 trillion / ~23 trillion in total assets. Despite this monumental growth, many asset owners continue to operate in much the same way as they did 40 years ago. One such area is in exposure management. In this blog, we look at the challenges and limitations of current exposure management processes and how these can be addressed through modern data-centric approaches. 

Exposure management is a fundamentally important process for asset owners, allowing them to identify, assess, and control risks. This, in turn, enables them to protect and optimize their assets. The process is also central to compliance efforts, as it helps asset owners keep on top of evolving regulations and industry standards and maintain a robust risk management framework. Through exposure management, asset owners can also increase the confidence of stakeholders by demonstrating that they have taken measures to protect the value of their assets.

Navigating the complexities of exposure management

However, many asset owners struggle to manage their exposures effectively. This is because, for the most part, practices have failed to keep pace with the evolving markets. Typically, asset owners maintain spreadsheet-based risk registers to capture and analyze potential risks using scenario analysis, stress testing, and other analytical models. This is a highly time-consuming and error-prone process.

At the same time, asset owners face a data deluge and must grapple with vast volumes of data from multiple sources, making it a challenge to manage and extract valuable insights. Ensuring data quality and integrity remains an ongoing struggle, with discrepancies and outdated information hindering decision making and increasing risks. 

Fragmented data ecosystems further impede integration and holistic analysis and make it hard to achieve a comprehensive view of exposures. The absence of standardized formats and classifications poses significant hurdles, hampering efficient data aggregation and analysis. Navigating complex data governance frameworks and compliance regulations adds complexity to maintaining data privacy, security, and compliance for asset owners.

Increased market volatility is exacerbating these challenges and further exposing the limitations of asset owners’ exposure management capabilities. Even markets that have traditionally been considered stable are now volatile, with the impact of UK economic policy on the gilts market during Liz Truss’ short term as P.M. being a case in point. In September 2022, the UK bond market experienced unprecedented volatility, driven by the then Chancellor’s unfunded mini budget announced on 23rd September. The market reaction caused gilt prices to plummet and yield to skyrocket within a matter of days. Asset owners are using exposure management capabilities that were designed for a much slower paced and more stable environment than ours.

Adapting to the changing landscape

The continually evolving regulatory environment is also a challenge. With every new regulation or standard, asset owners must adjust their capabilities, which can layer on yet more complexity. One key emerging challenge in this respect is, particularly in the E.U., the direction of travel toward mandatory net zero reporting requirements for businesses. Asset owners will in the future likely need to access robust and accurate emissions data across their investment portfolios. The carbon risk will be as pertinent as any other in terms of exposure management, and that in turn will require much greater access to timely and accurate data than many are ready for at present.

Employing technology is crucial for asset owners to effectively manage risk exposure effectively. By leveraging advanced solutions, asset owners can automate data collection, analysis, and reporting processes, enabling real-time insights into their risk profiles. 

Technology-driven risk management tools provide sophisticated modeling and scenario analysis capabilities, allowing asset owners to assess potential risks and develop proactive mitigation strategies. Furthermore, technology facilitates enhanced data integration and aggregation, enabling a holistic view of exposures across different asset classes and portfolios.

Ultimately, embracing technology empowers asset owners to make informed decisions, optimize risk-adjusted returns, and navigate the dynamic landscape of risk management with greater efficiency and agility.

Learn more about our cloud-native Matrix investment management platform to manage your exposures effectively. 

If you’re ready to unleash the power of exposure management, contact us to get started.

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