The techniques used by SoFIE, known collectively as âvariance reductionâ, target extreme values where the greatest financial risks arise. These techniques focus attention on critical areas of interest for each portfolio individually. In turn, the simulations highlight a portfolioâs unique material risks. Risk managers will immediately benefit by employing these techniques in three ways:
1.The fat-tailed characteristics of financial portfolios, especially those with any derivative securities, are better modeled;
2.The stability of the output is vastly improved compared to almost all other Monte Carlo simulations, and depending on the portfolioâs investments, the variance of the output can be improved by over a factor of 50;
3.Far fewer simulations are required to achieve a higher accuracy result, thereby improving speed and reducing computation time.
Adam Winik, Director of Financial Engineering at Investor Analytics said, âIA's implementation of these innovative techniques, together with our flexible framework, allows for robust modeling of a wide range of asset classes. IAâs full re-valuation of derivative contracts in the simulation captures the true non-linearities that often times drive the risk of a portfolio.â
Winik added, âThese advanced techniques were developed and tested by top academics to improve the state of the art of risk management for todayâs critical financial markets.â
Sherry Wolfe, Chief Client Services Officer of Investor Analytics said âIAâs clients are those investment professionals who understand both the art and science of high quality risk management. SoFIE builds on our history of transparency, accuracy and reliability. Weâre excited to offer this cutting edge analysis, designed specifically to focus on risks of extreme losses.â
SoFIE offers a significant improvement in the risk analysis of financial portfolios for all institutional investors including banks, mutual funds, hedge funds, pension funds, endowments, and other financial portfolios. Risk managers seeking to improve their estimates of risk will benefit from SoFIE which will provide managers and investors greater confidence that their risks are being accurately identified and effectively managed.
Last month, Investor Analytics and BNYMellon announced the launch of their Report entitled, âTomorrowâs Risk Management: How behavioral economics, cognitive studies and complexity science add up to more than their own sumâ. The Study recommends that those managing risk â whether asset owners or asset managers â incorporate lessons of known human biases into market stress tests and scenarios.â