Axioma develops software so multi-asset units ‘speak the same language’ on risk

Analytical software provider Axioma is trialling a program with some clients to give a unified view on the risk in multi-asset strategies to both the front and middle office – and maybe helping diffuse internal politics between chief risk and chief investment officers.

Ian Webster (pictured), Axioma’s managing director, Europe, says the package, which the firm expects to roll out more broadly early next year, covers equities, bonds, commodities and derivatives. Axioma is examining adding infrastructure and real estate to it.

Multi-asset managers and their risk officers can use it to analyse direct market investments alongside passive and active fund holdings.

The package should aid discussions about risk between traders, portfolio managers and chief investment officers on the one hand, and risk managers on the other hand, he says.

They are two groups that have not always agreed on the topic of ‘risk’ – which lies at the heart of what they do.

“The two groups do not necessarily speak the same language nor have the same toolset and at some point it can become an adversarial discussion, as opposed to discussing what is in the best interests of the firm and those managing the risks.”

Webster said middle-offices had often become very focused on value-at-risk, which uses historic market data to estimate possible losses within bounds of certainty.

“The front office would see VaR as one measure [of risk], but not the only one. At that stage it becomes a negotiation between the risk measures and having a discussion about what the most appropriate measure is.

“If you have the two groups with different tools to measure risk, how do you set your appropriate limits at any particular junction. Having that discussion as an empirical conversation is tough when the CIO and CRO are using different toolsets.”

The need to have such discussions has also, arguably, been brought into focus by binary markets being either heavily in favour, or out of favour.

The question of how best to analyse risk has also been made more complex with recent growth in multi-asset investing – both by fund managers and allocators to funds – gains in popularity. Multi-asset was the only of long-term mutual fund strategies covered by Lipper to take in net new business last year.

Webster notes the different inputs to risk for equities and bonds – ratings, duration and the like for fixed income, and EPS, PE ratios and volatility for equities.

Given such a range of inputs, he says, “if you think ‘risk’ is simplistic and you want a simple answer, or one number, you are deluding yourself”.

A multi-faceted view will provide a range of numbers, he says, but again it is important both the front and middle offices have the same numbers to work from, using the one model.

If clients wish to modify Axioma’s model, they can, and if they wish to decompose how the model has been created, they can. “It is all about transparency and flexibility in the risk process.”

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