The unseen impact of a volatile market

  • Oil prices reaching their lowest of all time
  • Increase in the number of infections globally
  • Liquidity crunch in the market
  • Market-cap limits: For equity investments, it is advised that portfolios be invested in within market-cap limits. The market cap of most securities have dropped sharply, breaching client guidelines.
  • Exposure rules: It is important to comply with exposure limits that curtail a portfolio manager’s ability to invest. Market volatility has increased the number of breaches of maximum and minimum limit guidelines. Concentration rules are difficult to manage in pre-/post-trade monitoring, while dealing with market volatility and ensuring AUM remains compliant with regulations.
  • Dividend-paying investments: Some companies have declared they will not to pay a dividend for the year and some have postponed dividend payments, breaching guidelines, as clients are interested in investing only if a company pays dividends.
  • Rating changes: Different clients have different investment restrictions and amid the pandemic, bond ratings have changed as credit quality has decreased. Portfolio managers have to comply with client guidelines when bond ratings drop. They have to sell or seek permission to hold. Bonds ratings may be downgraded for many reasons. A client who wants to invest money would look to invest in bonds whose credit quality is improving and sell bonds when credit quality is declining.
  • Currency hedging: It is difficult to maintain hedge ratios amid global currency fluctuations, when there is a difference between spot FX and the settlement amount.
  • Regulatory guidelines: It is the portfolio manager’s duty to comply with client guidelines; however, it is also important to meet regulatory requirements such as the US 1940 Act, Undertakings for the Collective Investment in Transferable Securities (UCITS), and Alternative Investment Fund Managers Directive (AIFMD). Regulatory breaches need to be corrected as soon as practicable; it is the analyst’s duty to see the portfolio manager ensures the guidelines are in compliance.
  • Portfolio managers can make suggestions to their clients or clients could provide the portfolio managers with flexibility and re-review the guidelines wherever possible
  • Instead of correcting passive breaches, clients can give provide the portfolio managers with some flexibility to hold securities or let breaches auto-correct by market movement. Otherwise, portfolio managers may have to sell the securities at a loss. This could help the portfolio managers to weather the liquidity crunch in the market.



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Acuity Knowledge Partners

Acuity Knowledge Partners


We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.