Investors are continuing to boost their portfolios with alternative investments – but BNY Mellon says they are doing so with a “false sense of security” around risk data assumptions.
In a white paper called ‘Considering the Alternatives: A Practical Look at Enterprise Risk Analysis and Alternative Investments’, the firm suggests various ways risk can be controlled more efficiently, such as using a single provider to pull together an institution’s total investment data.
This enables a more uniform approach in calculating enterprise-wide risk and exposure, whereas data across multiple platforms adds to the complexity and likelihood of errors.
The paper looks at the risks of incorporating illiquid and non-transparent investments into portfolios and the various risks that could affect an organisation, including regulatory, market, reputational and compliance.
Frances Barney, head of consulting-Americas for global risk solutions at BNY Mellon, said that there are already some regulators who require reports on stress testing and scenario analysis, such as Solvency II for insurance companies, and Ucits for European investment funds.
“We’ve learned the most crucial component is the veracity of the underlying data, which becomes even more important and difficult to manage as more opaque assets are held in the portfolio,” she said.
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