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How Asset Managers Can Handle the Global Financial Markets

By Your Money Site
Asset Managers

Today, markets are globally connected to an unprecedented degree, with most businesses, banks and financial institutions ever more international in scope. It has also become commonplace for wealthy people, financial experts and even the public to make countless investments in distant lands.

For asset managers in particular, this increasing interconnectedness presents not only a series of challenges, but also opportunities. So, what kind of areas do they have to navigate in order to survive and thrive in the global world of investment?

Getting Currencies Right

If someone is responsible for managing assets for any institution that operates across borders, one of the most important tasks is to deal with the issue of currency fluctuation. In simple terms, if an American multinational bank, for example, has a series of assets across several continents, it will also be exposed to significant risk if there is a huge rise or fall in the dollar against another currency. In many instances, currency fluctuation can cause the value of its assets in each region to vary by billions of dollars.

Similarly, a large company that has revenues in different parts of the world can also be hugely sensitive to changes in the value of currency. If, for instance, the main currency of a given target market plunges, the company may find itself struggling with sales, while the cost of raw materials and supplies can also experience major fluctuations due to changes in currency.

Although currency risk can never be completely eliminated, there are nevertheless a number of ways to mitigate it to some extent. Some companies, for example, will insist on arranging international contracts in the currency of their headquarters, instead of the local market. In financial institutions, it is typical to perform currency hedges such as forward contracts or FX options. In each case, the main focus is on reducing variation and isolating local equity.

Staying in Line

Of course, for any institutional asset manager that operates in an international environment, a detailed understanding of each market at hand is also vital. Here, even the most well-informed asset manager will to some extent rely on the support of others, given the vast complexity of markets and the nuances within each system.

For this very reason, major investment firms such as Bank of New York Mellon, which has around $50tn in assets across the globe, will have local branches all over the world. After all, when making major investments overseas, it is essential to be able to rely on local knowledge and expertise in a wide range of fields.

In addition to finding the best ways to make profit and mitigate risk, it is also especially important to be aware of differing regulatory environments. For this reason, asset managers require not only extensive individual training in this area, but also access to local and international legal experts to ensure full compliance across markets and borders.

Risks and Rewards

Finally, it is also important to consider geopolitical risks. Naturally, very few people can accurately predict when and where the next conflict or trade war is going to break out. Even with climate change, it is extremely difficult to foresee how it will affect government policy and investment patterns in the short and long term. At the same time, it is possible to draw up contingency plans or arrange investments so that assets can be secured, and, again, excessive exposure to potential losses can be mitigated effectively.

Here, diversity of assets is often one potential solution, though most asset managers will also look to engage in scenario planning, cross-functional teams and active monitoring of geopolitical situations so that they can always respond in a timely manner to any upheaval.

Of course, as time goes on, the trend of increasing integration and dependency is only likely to intensify. Although there might be periods of instability and more isolationism, the rise of ever more rapid technological development and digitalization means that all asset managers must become experts in managing global assets and highly complex interdependent systems. For this reason, taking the time to understand how the world operates as an intricate and integrated system isn’t just a good option – it’s a must.

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