Q2 2024 Update: Real-Time Risk Exposure Report

Executive summary:

  • Investors should be aware of potential real-time market exposure risks when implementing large changes to their portfolios.
  • Case-in-point: During the first quarter of 2024, one market hour of misaligned portfolio exposure impacted performance by +/-26 basis points.
  • Investors can better manage real-time implementation exposure risks with a transition manager and an overlay manager.

As institutional investors, we most often represent risk as standard deviation or tracking error. But when we implement changes in our portfolios, the real-time risk happens much faster. Those standard deviations will impact portfolios not on an annual scale, but in hours or even minutes. What happens in those minutes can have lasting effects on performance.

Investors generally don't have visibility to the real-time implementation slippage that can occur without an intentional focus on real-time exposures. Very few investors have detailed real-time post-implementation reporting to verify that their exposures were managed appropriately throughout the course of implementation.

The cost of just one hour of misaligned exposure

How much can a market hour of misaligned portfolio exposure impact performance? More than you might think. The risk of a market hour, as represented in the chart below, demonstrates just how impactful it can be. In the 60-day period ending March 31, just one market hour had a standard deviation of +/- 26 basis points for the S&P 500, while U.S. Treasuries had a standard deviation of +/- 31 basis points.