Fewer than half of German institutional investors in a survey use risk modeling to detect correlations between asset classes, a finding described as concerning.
The vast majority of investors (90%) state that risk models play a key role in mapping the effects of diversification. However, only 38% of those polled use risk models to forecast correlations.
Alexander Schindler, a managing director at asset manager Union Investment, says he is concerned that just one-third of investors use risk models in correlation forecasts.
"The current capital market climate makes it more essential than ever for investors to diversify their portfolios. This means that the systematic evaluation of correlation effects has become more important," he says.
Union Investment’s risk management study was carried out by Professor Daniel Rösch and Professor Philipp Sibbertsen from the University of Hannover and covered 106 institutional investors.
The asset management firms says the vast majority of institutional investors in Germany have no doubts about the importance of risk models despite widespread criticism of the methods used to measure capital market risks in the wake of the financial crisis.
On the other hand, mathematical models are most frequently used by institutional clients to predict key risk indicators (61%), followed by volatility (59%) and investment returns (57%).
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