“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” — Mark Twain
It was ingrained as a central tenet of investment lore from the very earliest days of that discipline: there’s no lower-risk investment than property. The U.K. even has a colloquialism for it, a synonym for anything seen as risk-free: “as safe as houses.”
However, as the 2008 housing bubble demonstrated, the time came when it was no longer quite that simple.
As it turned out, of the trillions of dollars apparently “safely” tied up in property back then, a huge proportion actually wasn’t safe at all. Quite the reverse, in fact. Most people — plenty of economic and investment experts included — didn’t realize or even suspect that there might be a problem until it was much too late.
How? Why? The reasons are as well-documented as they are manifold, and far be it from me to go over them again here. In any event, at least one thing is absolutely plain: few people would have placed funds at such an astronomically high risk had they known that it was a high risk, one with seismic implications.
Now it goes without saying that, in and of itself, risk isn’t unusual in our world. Market risk, credit risk, gearing-based risk, conduct risk, operational risk — its varieties are endless in the investment space. Furthermore, there are institutions, funds, brokers, investors and investment instruments among us that are specifically geared to welcome and leverage risk, rather than avoiding it.
With risk aversion, so the argument goes, comes stagnation, which is rarely a good thing in a free-market economy.
Yet, even the toughest speculator would agree that whatever a risk might be, it should only be taken if its exact size, scope and nature can be fully calculated and understood. If you don’t truly know the risk you’re taking, then it’s simply too risky. And when such things aren’t fully transparent and contended for, they have a nasty habit of unravelling, both quickly and detrimentally.
Moreover, when high-magnitude risks do play out on the wrong side, they very often end up impacting not just individual banks, but also lives and whole economies. Take the sovereign debt crisis faced by Greece in the wake of 2008, which was just one of many similarly damaging scenarios.
Here’s the real problem, though: not only do many investment organizations not know what they don’t know when it comes to risk, but they also don’t know that they don’t know it. Put more simply, what many businesses currently regard and use as risk knowledge actually amounts to little more than semi-educated guesswork and conjecture.
Trying to in some way “de-risk” your risk is critical then. But is that really possible? Can institutions ever really know every detail of every equity, stock, fund and bond constituting their portfolios? Every nuance? Every minute of every day?
Actually, yes. As with so much these days, it’s all about data: data transparency and availability, and giving the right people access to the right data, at the right times. And, happily, there are now more and more tools available to help.
It’s all about creating a smart, truly integrated risk profile: ensuring every last scrap of relevant data is brought together, sorted, stored, managed, leveraged and made available where it’s needed most, when it’s needed most. Such a profile will enable an understanding of not just what risks are being taken, but why, where and how. It will properly weigh the prudence of those situations and their alignment with your hedging and wider corporate strategies.
Taking such an approach delivers other, broader benefits too.
From a compliance perspective, for instance, an integrated risk profile helps firms adhere to directives like Basel 239. It strengthens their risk-data aggregation capabilities and internal risk reporting practices, in turn, enhancing risk management and decision-making processes.
Providing a global view of both past and present, such a profile also makes future risk and potential consequent distress more predictable and thus easier to strategize for. It also helps in the development of Early Warning Systems (EWS) to protect financial and operating structures.
Then there are technologies like Natural Language Processing (NLP). A subset of AI, it can help identify any issues and trends likely to impact the financial markets now and in the future — all in real time. Such capabilities feel doubly pertinent in today‘s pandemic-colored world.
In a marketplace in such dramatic flux, that kind of edge can make the difference between innovation, transformation, survival and success on the one hand, and stagnation, loss of relevance and failure on the other.
That’s one of the reasons why Hitachi Vantara is so heavily invested in the development of such technologies. It’s also why we’re so uniquely placed to help financial services firms to do the same: to take complete control of their risk data and start making it pay.
But there’s also another reason, one that is perhaps more crucial than the first in the context of all of the above: our ongoing commitment to Powering Good, to helping create a safer, smarter, better world for all who live in it. We think that’s a noble cause. It’s one in which every business has a part to play, and one we’re extremely passionate about.
Risk-free risk? How about we start ingraining that as a central tenet of investment lore?
Suranjan Som is Vice President, Head of Financial Services Consulting, and Client Engagement Partner, EMEA, at Hitachi Vantara.