Use of derivatives by fund managers will rise over the next 12 to 18 months despite market turbulence and record levels of redemptions from hedge funds, according to a new report by Protiviti, a risk consultancy. However, it adds that some firms face difficulties in improving their derivatives capabilities.
The study said 79% of traditional fund managers, hedge fund managers and service providers expect their firm’s use of derivatives to increase. Most (84%) also plan to improve their derivative capabilities over the coming year.
According to 68% of respondents, the improvement plans are being driven by demand from the front office and competitive pressures. UCITS approval and the need for daily risk management was the next most popular incentive to invest, according to one in ten of those surveyed.
“Investors are increasingly sophisticated and understand that market turmoil was more the result of poor lending practices and dubious debt securitisation arrangements than a result of questionable derivatives transactions,” said Rob Nieves, director, Protiviti, in a statement. “In many cases, it would appear that derivatives strategies have helped firms remove at least some down-side risk and our survey suggests that derivatives will play an increasingly important role in fund management going forward.”
Although fund managers and the wider investment community are still pursuing derivatives, 31% of those surveyed said that a lack of available skills and resources was the most significant risk they faced in managing derivatives in the future. Governance arrangements and the segregation of duties was cited by 21% of those surveyed, with the remainder naming time constraints on daily processes, inaccurate data and robustness of the control environment.
“While it is clear firms would like to improve their derivative capabilities, many are caught in a vicious cycle of being unable to free-up skilled staff who can then tackle more strategic issues like implementing new systems and getting better value from their outsource providers,” said Nieves.