Risk Management Technology: BlackRock’s Aladdin Risk

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Market movements over the past year have been highly volatile across multiple asset classes. This has presented a challenge for central banks, especially those that have diversified their foreign currency investments into new assets such as credit instruments and equities. Being able to more accurately assess the actual risks, returns and diversification trade-offs of portfolio positions against custom benchmarks using credible stress scenarios is critical to ensuring that portfolio positions investment are properly balanced.

This is where Aladdin Risk, the risk management engine developed by $10 trillion asset management firm BlackRock, offers an edge. The system not only provides day-to-day transparency through portfolio positions and exposures, performance and attribution, portfolio risk, scenario analysis, compliance and monitoring, but also helps institutions – of all types – to rethink and redefine portfolio management. Whether its clients want to better understand their underlying risks, their asset allocations or the construction of green portfolios, the platform provides an accurate feed for rapid position reporting – internally and externally managed – on most asset classes and types of instruments, including derivatives, structured products and exchange-traded funds.

The Bank of Israel has been using Aladdin Risk since 2019

Over the past year, the service has also included information on private assets, such as real estate, private equity and infrastructure. While most central banks are not active investors in private assets, many sovereign wealth funds do invest in these areas.

All of this is designed to give investors the data and transparency to make their own decisions on different metrics, including duration, convexity, value-at-risk, credit risk metrics, and credible stress testing. Central banks can choose the best individual measure or the best combination of measures to meet each use case. For example, one institution recently implemented VAR – which offers an alternative measure to credit spreads – to determine expected credit loss by estimating probabilities of default, recovery rates, and provides a clear view via a matrix of rating transitions.

Complex benchmarking

Another benefit of the Aladdin system for reserve managers is the ability to create custom benchmarks – measured against performance. Aladdin not only allows customization of referenced asset types, but also currency reference – and BlackRock specifically configured the platform to accommodate a central bank client, the Bank of Israel.

Israel’s central bank – which started using Aladdin in 2019 and now manages $208 billion in Effects assets (including reserves purchased under its natural gas purchase program) – sets its reference currency, a basket of currencies that will be used, in addition to the shekel, to measure the rate of return on its reserves of exchange. As the rate of return of Effects reserves are also measured in terms of the reference currency, its composition is defined as the risk-free currency composition for the portfolio managers of reserves. It then ensures that its asset exposures are aligned with the basket from a Effects exhibition perspective.

Oded Levin

Oded Levin, BlackRock

“They have a sophisticated hybrid reference structure, which required some system customization to make sure we could support it properly,” says Oded Levin, Aladdin Analytics and Quantitative Solutions Team Manager at BlackRock.

Another major advantage for Aladdin’s Bank of Israel was that it previously had no single, consistent view of the risk and return of internally and externally managed assets. Aladdin’s intro anticipated this.

“A portion of our portfolio, which includes equities, corporate bonds and mortgage-backed securities, is managed externally by various external managers,” says Roee Levy, senior analyst in the management unit. risk department of the Bank of Israel’s markets department.

“In Aladdin, in addition to internal portfolio positions, we can also see our holdings daily with each external manager, allowing us to analyze our internal and external investments more holistically.”

Another important set of benefits for reserve managers relates to environmental, social and governance aspects (ESG) – as well as climate modeling tools linked to the securities. Revision ESG is becoming an increasingly important task for central bankers who invest taxpayers’ money. Aladdin’s platform capabilities allow reserve managers to not only analyze their positions from a ESG perspective, but also assess the ESG impact during portfolio changes.

Yitzi Stern

Yitzi Stern, BlackRock Solutions

This ESG turnkey solution can also facilitate the supply ESG information to the outside, thus helping to respond to changing needs for transparency. “Central banks will likely need to provide greater transparency on how the portfolio is viewed from a ESG point of view,” says Yitzi Stern, Managing Director of BlackRock Solutions.

Ultimately, Aladdin Risk is an extensive risk technology engine that also offers stress testing capabilities that provide useful insights into portfolio behavior under macroeconomic circumstances or changes in market context, such as volatility. increased or reduced. This ability to stress different scenarios, where covariance matrices or individual factors are shocked, can help reserve managers gain clearer insights into portfolio impact, based on Aladdin and/or their own data.

This capability can be used as part of a regular asset allocation process to analyze the sensitivities of strategic portfolios to various scenarios and potential events – to better understand overall resilience.

Stress testing and scenario analysis can also be used to analyze the risk to the portfolio of new events that cause increased volatility. This is something the Bank of Israel is currently investigating in the context of the current crisis between Russia and Ukraine.

“For this analysis, we used long-term correlations according to our standard long-term model that we use regularly. Additionally, we looked at the results of the different scenarios using also short-term correlations, based on the period of pressure around 2014 when Russia invaded Crimea,” says Roee.

“There is no doubt that using Aladdin has been a major step in improving and promoting our risk management,” says Roee of the Bank of Israel. “Even today, two years after the implementation of this tool, we continue to learn how to better use it and utilize its capabilities for our risk management needs.”

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Victor Mendez-Barreira, Ben Margulies and Riley Steward

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