Active Asset Managers Face Asymmetric Risks from Paradigm Shift

Xing, Victor (2018): Active Asset Managers Face Asymmetric Risks from Paradigm Shift.

Abstract

Active asset managers face asymmetric risks from a paradigm shift in monetary policy regimes and inflation trends, as some active funds increased risk-taking to compete with passive funds - the primary beneficiaries of prolonged low volatility. A decade of volatility and term premium suppression also led some active funds to adapt a bearish volatility stance and increased their vulnerabilities to a regime change in inflation dynamics, as they transfer risks from debt issuers onto their balance sheets.

A growing body of research now point to cumulative policy costs from prolonged unconventional monetary easing, and aversion to mounting policy costs and retreat from globalization would heighten volatility and financial instability. Likelihood of regulatory scrutiny would rise if non-bank financial institutions' complacency on volatility contribute to financial stability, and "Volcker-like" rules imposed on non-bank asset managers would lead to crippling impacts on fund operations. Thus, active portfolio managers adept at managing volatility can minimize regulatory scrutiny by counterbalancing systemic risks from passive strategies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Active fund management, passive fund management, volatility, monetary policy, quantitative easing, policy costs, financial stability risks, regulatory measures
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services

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