Bloomberg to Offer Next-Gen Risk Models to Enterprise, Terminal Clients

Bloomberg is set to launch a risk model for its enterprise and terminal users by the end of 2020 that unifies the data giant’s legacy risk model with the Barclays Risk Analytics and Index Solutions (Brais) business that it acquired in 2016.

“Over the last two years, we’ve been working to consolidate these two models, along with new features we are developing, into a single, next-generation Bloomberg risk model that will be available to all Bloomberg clients,” says Antonios Lazanas, head of portfolio and index research.

When Bloomberg acquired the Barclays business, it was integrated into the Bloomberg environment and run in parallel with the existing Bloomberg Port risk model to avoid disruption to incoming clients. The new model will combine the best of both, along with new features that the research team is developing.

Port, Bloomberg’s Portfolio and Risk Analytics solution, sits within the company’s broader product suite for the buy side. As head of research, Lazanas is responsible for creating the models that are built into Port—the version that is integrated with the terminal and its advanced counterpart, Port Enterprise, which is for clients that pay an additional fee to run their businesses using Bloomberg’s models with ad hoc use of the terminal.

As the coronavirus crisis has unfolded and upended the global financial markets, Port has seen a “significant increase” in interactive use, as well as more frequent questions from clients trying to make sense of nuances involved in risk estimation and the models’ outputs, which can change based on factors like time horizon or whether the prices used have gone stale.

In a duration time spread (DTS) demonstration for WatersTechnology, Lazanas illustrated how Bloomberg’s advanced risk model projects the path of credit volatility going forward. To do that, it starts with looking backward.

“So far, the reaction of the market in aggregate has been fairly similar to 2008,” Lazanas says. “What will happen going forward depends on how well governments and various organizations manage the crisis, and most of all, of course, how much the coronavirus will continue being a threat to the global economy.”

Comparing market environments requires looking at measures of market distress during both periods, such as Cboe’s VIX volatility index based on S&P 500 index options, or at the realized volatilities of other indexes, such as the Bloomberg 500 Index (B500), a large cap equity index launched in September 2019.

The advanced risk model can take in daily, weekly, monthly, and annual fluctuations of the market and combine them. It offers two separate features: the ability to be very responsive to the marketplace in real-time using high-frequency data like daily fluctuations, and the ability to interpret that data in the context of the user’s desired time horizon. For example, a hedge fund might rebalance its portfolio daily, while an institutional asset manager might do so monthly, but a pension fund might rebalance very infrequently, if ever.

In order to quickly respond to market-moving events while ensuring accurate risk predictions at different horizons that account for the expected dissipation of volatility, a good risk model needs to take in various data sources.

“Let’s say that your horizon is one month. So on February 28, as the markets began to react to the coronavirus crisis, you want to assess the potential impact to your portfolio over the next month,” Lazanas says. “If you only look at month-over-month returns, you only have a single data point—the month of February with an abnormally large return—and that’s not enough, right? So you need advanced risk models that use additional metrics to be able to sense a crisis in development and adjust risk estimates.”

Beyond consolidating the models, Lazanas and his team are examining to what extent they can use advanced risk models to create better hedges and long–short equity strategies for the marketplace. The complex part of doing that is nuance. The more volatile a hedge is, the faster it moves, the more turnover it generates, and the more costly it becomes to trade.

“What we found is that most long–short equity strategies, which seek to be market-neutral by hedging the long portfolio with the short portfolio, have suffered at the onset of the coronavirus crisis,” Lazanas says. “This was caused by the fact that the betas of individual stocks to the market changed abruptly, rendering such a hedge ineffective and leaving most long–short strategies with a net long market position at the exact time when investors needed the hedge to protect them from market losses,” Lazanas says.

Though the new risk model is timely amid widespread financial woes, Lazanas says the project was not expedited by the crisis, and that Bloomberg does not anticipate changing any of its plans due to the pandemic at this time.