Global macroeconomic challenges have firms battening down the hatches. Instead of tightening budgets to weather the storm, how can firms find new sources of value to emerge stronger?
Open any newspaper these days and it’s easy to find an uncertain report on the economic outlook. In November 2022, the Bank of England warned the UK is at risk of a downturn. An ongoing debate about taxes and government spending ensued. In early March, the British Chambers of Commerce optimistically reported the economy is likely to shrink less than expected.
In addition to an unstable macroeconomic environment, wage inflation is compounding fiscal worries. What’s more, many financial services firms still report a shortage of skilled workers – particularly software developers, investment operations experts, and asset management professionals – to support growth in a more digitized world.
Despite some market volatility in the UK, there are pockets of optimism. Whether it’s the investment performance of notable funds or firms bravely doubling down on their growth strategy, firms looking beyond today’s market turmoil will be best positioned.
Finding New Sources of Value
With volatility comes demands for greater access to relevant data for smarter decisions and transparency in a fast-moving market.
Looking at specific segments of the financial markets, institutional asset managers have been impacted by a material drop in revenues driven by their fee models, which has led to cost and margin pressures. A web of complex systems and disparate data often limits agility and the ability to unify information. As institutions accelerate their focus on alternatives, hybrids, and other sources of value creation, processes to reduce the risk of manual errors, scale operations, and re-focus employees on higher-value activities will be critical.
Pure play hedge funds, known for thriving during periods of volatility, must be able to nimbly move into different asset classes to capture alpha. For example, many hedge funds have pivoted to commodities in the current macroenvironment and energy crisis. A strong grasp of books in downward markets and tools to expertly ingest and organize datasets are key to helping hedge funds understand and analyze new opportunities.
Turning to the private markets, economic uncertainty, inflationary pressures, and geopolitical unrest are taking their toll on private credit and private equity. Rising interest rates have slowed the real estate market. While infrastructure may be a relative safe haven, it has its own share of uncertainty and challenges. New datasets, sources, and vendor systems along with increased demand for timely and richer insight mean private market firms need a handle on their data. Intelligently managing data will be essential to helping firms thrive in periods of volatility and differentiate business from peers.
Beyond Traditional Cost-Cutting Measures
At a time of heightened uncertainty, firms need an edge.
Recent news headlines report more companies turning to headcount reductions to manage their budget. Other cost-cutting measures may include adjusting employee compensation awards, decreasing business travel, and limiting new investments.
These decisions are often knee-jerk reactions and are not likely what firms need to gain that edge. Headcount reductions are often a compulsory reaction to market conditions. Instead, redeploying the workforce into higher value-add roles can create opportunities for firms to think beyond short-term cost savings. As a result, teams are able to focus on innovation and what’s next in their evolution.
The braver firms are not shying away from making investments for the longer term. For some, that means turning to technology to unify data, streamline and automate processes, improve efficiencies, and ultimately reduce costs. Adopting proper technologies in an ambiguous economy not only helps firms weather the storm, more importantly, it can help better position them to thrive after uncertainty passes.
Using Technology to Manage the Impact of Market Volatility
The common thread many firms are up against is the demand for accurate and useful data. As volatility drives higher trade volumes, firms need to react quickly to market changes and make informed decisions. They also need to be able to scale their business up or down based on the market’s trajectory.
Operationally, volatility affects more than trade volumes. With market downturns, investment firms are likely to see a rise in margin calls and a heightened focus on cash management – furthering their need to have proper technology in place.
Whether it’s an institutional asset manager exploring new asset classes, a hedge fund chasing alpha, or a private market firm with dated tools, many organizations find their existing systems are no longer fit for purpose.
For many, legacy infrastructure was not designed to flexibly support new asset classes. Manual workarounds often limit their ability to scale or understand risk at a time when volumes are increasing.
Out-of-the-box solutions that support multiple asset classes enable firms to quickly move into new markets. By evaluating their technology model and understanding their next normal, firms will be in a stronger position to excel in a highly competitive and changing market. Easier access to data that delivers greater transparency will help firms make smarter decisions that generate richer analysis and insight.
Chris Barrow, Head of Arcesium Europe
James Horridge, Vice President of Sales Engineering for Europe, Arcesium
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