Antonello, thank you for joining us to present at the upcoming International Fund Management 2017 Summit. Please provide us with an overview of your current role at BlackRock?
I manage a team responsible for risk management and quantitative analysis on Index strategies in the EMEA region. I also hold a coordination and advisory role on risk management of Alternative Investment Strategies in EMEA.
Our responsibilities include identifying and managing risk across the firm, reviewing BlackRock’s investment management processes, designing analytics and standards for investment risk and performance measurement, assisting with the development of analytics used for risk and portfolio management, and advise businesses on portfolio construction, hedging strategies and other quantitative aspects of managing risk and return for portfolios.
You will be providing insights into incorporating a level of liquidity in stress testing for a broader overview of cash flow beyond P&L. What key considerations need to be made during this process?
Stress tests and scenario analysis should always be defined in reference to a holding period. When the aim of the analysis is estimating the value an investor may obtain from realising investments and the time it may take to achieve it following a market shock, one needs to take into consideration the interdependence between market volatility and direction, intended traded volumes and transaction costs. These may exacerbate the impact of market factor moves on the realised PnL.
What is the impact of limited liquidity on funds?
If the liquidity profile of a portfolio’s investment assets is out of line with the profile of the portfolio’s liabilities, represented either by liquidity terms to investors, by future liabilities, or by funding or financing terms, one runs the risk of suffering forced liquidations, and realising investments at a suboptimal timing. This increases the risk of greatly reduced returns, or very material losses.
On the other side, if the liquidity profiles of assets and liabilities are consistent, it is possible to ride through periods of increased market volatility or stress and manage the realizations of one’s investments in a more deliberate fashion.
Low liquidity may also attract a premium in the market, in terms of increased expected returns; but this is dependent on being able to fund investment assets over the appropriate term.
What modelling challenges arise around capital flows?
Liquidity risk metrics are subject to multiple challenges, ranging from the low level of standardization of certain assets or financial instruments, to the opacity or complete lack of observable trading data for various markets; the constant evolution in markets structure and in the regulatory framework; the dependency of future flows on unobservable investors’ needs and requirements, as well as on other multiple variables, whose long term behaviour may not be easily predicted.
Other than the topic that you are presenting on, what other key challenges are you looking forward to discussing at the Summit with your peers? And why?
Continuing on the theme of liquidity premium and low liquidity assets, I would be keen on insights about investors’ appetite for cashflows-generating assets with very long expected life, but low to absent short term liquidity.
The general theme of the expected evolution of yields and credit spreads in the medium term is another interesting topic.
