Asset managers forced to find new ways to restructure portfolios amid market volatility 

Asset managers must always manage volatility, but they now face a number of macro forces that are converging on their strategies that require the restructuring of portfolio construction frameworks to shield capital against macroeconomic volatility and geopolitical instability. This needs a different, more nimble approach and has led to a reimagining of the portfolio data layer.

This requires rapid execution speeds in today’s multi-asset landscape and in order to manage complex alternatives, scale tactical derivative hedges, and accurately report performance to stakeholders, global asset managers require an uncompromised, single source of data truth.

Shifting strategies

Traditional, static asset allocation frameworks are rapidly being retired in favor of dynamic rebalancing, private-market exposure, and goal-oriented, core-satellite portfolio design.

This has been influenced by advanced portfolio management systems, according to more than three quarters (76%) of fund managers, and 75% say that integrated data analytics tools are necessary for real time performance measurement and attribution.

Seeking uncorrelated returns while limiting standard deviation across core portfolios, managers are increasingly executing a structural rotation into alternative asset classes. Nine in 10 (90%) predict that the inclusion of alternatives – specifically private equity, private credit, infrastructure, and hedge funds – within core strategies will increase over the next three years. This alters the requirements for liquidity across public and private asset classes, forcing managers to manage heightened redemption and underlying liquidity risks.

Hedging: the only way is up

The operational and macro landscape has grown fraught as technological cyber risks and cross-border asset threats have appeared. In response, global fund managers are increasing sophisticated derivative overlay and hedging, with more than half (55%) increasing their internal usage of hedging mechanisms over the past 12 months. Over the next two years, 79% forecast further that use of hedging strategies will increase.

There has also been a deliberate global rotation away from historically heavy US capital market concentrations in the search for growth. More than to thirds (69%) of fund managers project a structural rotation toward European equities and thematic investing over the next 24 months.

Influential forces

The management of climate related transition risks is also influencing regional capital flows. Over the next five years, fund managers see the ‘greening’ of institutional portfolios accelerating at vastly different speeds globally. Europe will remain the clear leader in this sustainability push, with 40% of managers anticipating aggressive, near-term structural green portfolio design. By comparison, the corresponding figures for the US and APAC are 18% and 12% respectively.

Static, annual or quarterly portfolio rebalancing cycles are being abandoned in favor of  automated, intra-day dynamic rebalancing protocols. With 77% manages rating the current quality and execution agility of their firm’s portfolio rebalancing frameworks as ‘good’ or ‘excellent’, this highlights the heavy technology investments made across the sector.

Nearly nine out of 10 (89%) fund managers have increased their firm’s baseline trading levels and altered portfolio construction over the past 12 months to adjust to market changes. A new, continuous tactical approach – Goal-Oriented Portfolio Design – will see managers build multi-asset portfolios around specific liability or cashflow targets, rather than a benchmark. All 250 firms surveyed rate their own capability in this area as either ‘quite sophisticated’ (68%) or ‘very sophisticated’ (32%).

The long-term execution paradox

Yet, the constant need for short term, tactical adjustments is creating a fund manager execution paradox. Fund managers are finding it increasingly difficult to maintain their long-term strategic asset allocations, with more than half (53%) conceding that it was a major, ongoing challenge. Only 4% said they face no friction in preserving their long-term strategic investment horizons.

What is clear from the research is that we are witnessing the emergence of a multi-asset execution paradox. Fund managers are confident in their goal-oriented strategies, yet more than half are struggling to execute their long-term visions because they are constantly forced to react to short-term volatility.

Navigating this environment demands state-of-the-art technological agility. Winning institutions will be those that possess the real-time reporting, seamless system integration, and advanced analytics required to turn macro volatility from a systemic threat into a competitive edge. Clearwater gives asset managers a unified view of public and private assets, so teams can model and manage complex portfolios as conditions shift.

To see the full data on who has the edge when every firm makes the same move, download the report, The Crowded Trade.