Risk in securities lending research paper launched
13 October 2010 RMA Conference
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Data Explorers today published their research paper on risks and returns in lending programs.
The paper, Securities Lending - is the risk worth the return?, recognizes that securities Lending remains a steady source of additional revenue for many asset owners and seeks to shed more light on how risk and return are balanced in different programs. The release of the paper is timely, since it coincides with the Risk Management Association (RMA) conference on securities lending currently taking place in Florida, USA.
Data Explorers collects daily program data from more than 22,000 funds. The paper looks at the range of returns and risks across a sample of these funds, summarized by provider.
The paper shows that in one example week, some program returns may be little more than a few annualized basis points; others may be earning the annual equivalent of 1% or more - enough to rival some active portfolio managers. The paper assesses risk through the potential for a collateral shortfall in the example week. Comparison of risk and return shows that some funds are earning high returns with limited risk while others are carrying a high risk level without appropriate compensation.
The study also looks at returns over longer periods, and this shows a very different picture. Programs running the most risk are those which have accumulated large cash buffers from previous stock lending. Perhaps this buffer encourages risk taking; or perhaps successful program managers have a stronger appetite for risk and achieve above average returns.
These results show that securities lending returns can be significant, especially over longer cumulative periods, and especially for those willing to absorb collateral risk. Program managers have considerable scope for optimizing the balance between risk and return.
Data Explorers offer detailed reports which track the main drivers of risk and return. Risk Adjusted Returns cover intrinsic returns, reinvestment income, haircuts, indemnities, counterparty default risks, collateral types, loan structures and stress tests, and place all of these elements in a peer group context.
David Carruthers, Segment Director at Data Explorers, said "Asset owners continue to find that Securities Lending can be an important source of diversification in their return mix. The data shows that many programs have achieved good, even outstanding risk adjusted returns. And help is at hand for those who have not."
The full report can be downloaded at www.dataexplorers.com/sites/default/files/rar-rma-final.pdf.
The paper, Securities Lending - is the risk worth the return?, recognizes that securities Lending remains a steady source of additional revenue for many asset owners and seeks to shed more light on how risk and return are balanced in different programs. The release of the paper is timely, since it coincides with the Risk Management Association (RMA) conference on securities lending currently taking place in Florida, USA.
Data Explorers collects daily program data from more than 22,000 funds. The paper looks at the range of returns and risks across a sample of these funds, summarized by provider.
The paper shows that in one example week, some program returns may be little more than a few annualized basis points; others may be earning the annual equivalent of 1% or more - enough to rival some active portfolio managers. The paper assesses risk through the potential for a collateral shortfall in the example week. Comparison of risk and return shows that some funds are earning high returns with limited risk while others are carrying a high risk level without appropriate compensation.
The study also looks at returns over longer periods, and this shows a very different picture. Programs running the most risk are those which have accumulated large cash buffers from previous stock lending. Perhaps this buffer encourages risk taking; or perhaps successful program managers have a stronger appetite for risk and achieve above average returns.
These results show that securities lending returns can be significant, especially over longer cumulative periods, and especially for those willing to absorb collateral risk. Program managers have considerable scope for optimizing the balance between risk and return.
Data Explorers offer detailed reports which track the main drivers of risk and return. Risk Adjusted Returns cover intrinsic returns, reinvestment income, haircuts, indemnities, counterparty default risks, collateral types, loan structures and stress tests, and place all of these elements in a peer group context.
David Carruthers, Segment Director at Data Explorers, said "Asset owners continue to find that Securities Lending can be an important source of diversification in their return mix. The data shows that many programs have achieved good, even outstanding risk adjusted returns. And help is at hand for those who have not."
The full report can be downloaded at www.dataexplorers.com/sites/default/files/rar-rma-final.pdf.
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