McKinsey supported a comprehensive survey with The Federation of European Risk Management Association which focused on the pandemic and corporate resilience. A key takeaway from the survey is that these risk professionals have shifted from focusing on a limited number of financial risks to a more holistic view focused on resilience.
Resilience is increasingly seen as core to the firm's strategic process, with greater emphasis on foresight capabilities through scenario and stress testing. Resilience is another way of saying that a firm needs to be, as stated by Nassim Talib, anti-fragile. While often discussed at a high level, resiliency still needs to be more fully incorporated into firm thinking.
Resiliency looks beyond responses to specific risks or shocks to how the firm can cope with stresses. There is a focus on the operational and technological challenges that are necessary when shocks occur. For money managers, there should be a change in focus from trading strategies to preparations for risk processes.
A greater emphasis on foresight skills and disruption and crisis response is not about trading but about how to prepare for what could be new opportunities. The foresight skills look beyond traditional risk analysis of volatility and focus on different scenarios that are not embedded in current or past prices. This is a hybrid approach between pure quant and discretion. Scenarios require vision and not just computation.
A good disruption and crisis response focuses on financial, operational, technological, organizational, reputational, and business-model resilience. Resilience can be a competitive advantage; it is holistic. Since we may not know the future, we must be prepared for any contingency. Resiliency is a process.
Perhaps this is the rationale for hedge funds moving into a multi-strategy approach within a single platform. Provide the operational and organizational structure that can support alternative strategies that will do well in different environments.
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