Institutional investors on tail risk events

Added 17th June 2015

Institutional investors in Asia-Pacific are more concerned about tail risk events such as oil price shocks, new asset bubbles or geopolitical tensions compared to their global counterparts, according to a study by Allianz Global Investors.

Institutional investors on tail risk events

Tail risk over the next year was cited by 52% of Asia's institutional investor respondents as a key concern compared to 41% of their global counterparts.

Tail risks are becoming more frequent due to the interconnectedness of global financial markets.

But nearly 44% of the region's instiutional investors said they do not have access to the appropriate tools or solutions to deal with tail risk, compared to 36% globally, according to the Global Risk Monitor survey report.

Furthermore, only 23% are confident their portfolio has downside protection from a tail-risk event compared to 32% of global peers.

Key risks

A majority (80%) of respondents said the greatest risk over the next 12 months is in Asia-Pacific equity markets. Market worries were driven by China's slowing economic growth, the expected US interest rate hike and a strong US dollar. “Most central banks across Asia are pursuing monetary easing either to spur growth or fend off deflationary pressures, yet all are conscious of the fact the US Federal Reserve is expected to increase rates this year, which could create a flight of capital to the US if rates in Asia decrease notably,” the report said.

Sophisticated and specialised techniques include derivative/option overlays (36% vs 33% globally) and currency overlay (33% vs 29% globally).

Investors in Asia-Pacific consider oil price shocks the most likely cause of a tail risk event that could trigger widespread market panic, followed by events in European politics.

A majority (72%) also believe inflation risk is high compared to their global peers (53%). Liquidity risk was also cited as a key concern in the region by 71% of respondents compared to 60% globally.

Risk management strategies

Asset class diversification (47%) is the most common risk management strategy among Asia-Pacific institutional investors, though much lower than the 61% global adoption rate. 

Other strategies used are duration management (44%) and inflation-protected strategies (41%) to combat interest rate risk and inflation risk.

Sophisticated and specialised techniques include derivative/option overlays (36% vs 33% globally) and currency overlay (33% vs 29% globally).

The report also stressed investors in Asia-Pacific are “prolific users” of alternative investments, with 73% saying that they invest in alternatives.

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