SS&C Technologies : Risk management and lessons learned from GameStop
April 28, 2021 at 04:51 pm EDT
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The most important lesson to learn from the recent GameStop event is the importance of risk management. But the point is not to try to forecast such an event. For the most part, GameStop being selected by the public for this wave of buying was more or less a random event. There are thousands of stocks that could have experienced the same thing-in fact, there are large stock price swings every day, just with less volume and publicity. Regardless of whether you are an individual or a large mutual fund, knowing if you have a 'GameStop Candidate' in your portfolio is critical.
How can you manage the risk of a GameStop type of event adversely impacting your portfolio? There is no way to predict when there is going to be a wave of public opinion that takes over a stock. However, you can look for information that might give you some insight into candidates. Just like most people look for diversification amongst sectors, currencies, and other such factors that might affect a portfolio, there are a couple of other things that could give you similar diversification information.
Short Interest - A wave of sentiment could come over any stock that could drive the stock prices significantly up or down. If there is significant short interest in a particular stock, losses can accelerate and keep mounting; but those losses need to be covered, which results in more buying.
Ownership - What type of investors own the majority of the assets you are investing in? Generally speaking, this can be accomplished by keeping three broad groups in mind: insider, institutions and retail. Restricted ownership or insider representation is very well regulated and is reported diligently, but distinguishing between retail and institutional investor representation of stock ownership is less straightforward. However, through top institutional ownership information, 'non-institutional' ownership can be inferred.
Knowing the percentage of retail investors vs. institutional, coupled with the amount of short interest could help indicate if a stock is capable of an event similar to what happened with GameStop.
The SS&C Algorithmics Managed Data and Analytics Service (MDAS) uses a two-step risk approach. The first step is to aggregate positions into 'groups' that share similar characteristics, such as thresholds of short interest or ownership interest groups. The second step is analytically determining the contribution that each group has to your portfolio risk. Metrics such as VaR Contribution per 100k$ of Exposure, or Marginal VaR can quantify each group's risk 'contribution.' Importantly, VaR will capture diversification impact. Learn more on the MDAS product page.
Alternative Investments, Asset Management, Insurance, Regulation, Risk Management, Wealth Management
SS&C Technologies Holdings Inc. published this content on 28 April 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 April 2021 20:50:04 UTC.
SS&C Technologies Holdings, Inc. is a global provider of services and software for the financial services and healthcare industries. The Company provides software-enabled services that allow financial services providers to automate business processes. The Company allows its clients to automate and integrate front-office functions such as trading and modeling, middle-office functions such as portfolio management and reporting, and back-office functions such as accounting, transfer agency, compliance and regulatory services. The Company provides its solutions within the institutional asset and wealth management, alternative investment management, retirement, financial advisory and financial institutions vertical markets. It provides solutions to the healthcare industry, including pharmacy, healthcare administration and health outcomes optimization solutions. Its healthcare solutions include claims adjudication, benefit management, care management and business intelligence services.