Source: Financial Times Markets Insight
In his recent article on FT.com, Terry Duffy, the chair and chief executive of CME Group, highlights the importance of effective risk management in the current environment of uncertainty and constant market challenges. Duffy notes that after two decades of easy money, investors must now face the reality that the markets are no longer one-sided, and investing requires more than just buying every dip.
The events of 2022, including the biggest interest rate shocks in recent memory, high inflation, and China’s Covid-19 lockdowns, have increased uncertainty on a global level. As the quantitative easing support programs for markets from central banks give way to quantitative tightening, myriad emerging headwinds have made risk management the alpha in investing.
Duffy argues that what were once considered to be 100-year events have become everyday occurrences, and as a result, risk management has been elevated from a supporting player to the star attraction. He notes that with fears of job cuts and possible recession ever present, relying on the “same-old, same-old” investment strategies is not only not an option, but the riskiest strategy of all.
Duffy emphasizes that effective risk management is what can provide above-average returns to active, passive, and everything-in-between investors. He notes that this is why we are seeing a flight to futures, as some of today’s most important trades are to manage risk. He argues that hedging can provide certainty in an uncertain market and that there are no havens for investors considering what all investors are up against.
Duffy notes that commodities are not immune either, as US food costs rose last year to their highest levels since 1979. Persistent concerns of global economic weakness continue to have an impact on global energy demand, creating price volatility. That’s also true in metals markets, where geopolitical events could compound the imbalance in supply and demand for minerals vital to an energy transition.
Duffy stresses the importance of innovation in shaping financial markets and growing business and economies. He argues that innovation is critical in enabling new businesses to sell debt and raise capital to fund expansion opportunities, bring ideas to market, and develop new products, all of which create jobs and facilitate the evolution of industry. However, he notes that not every idea is a good one and that innovation needs a use case that demonstrates purpose, solves a problem, or creates a benefit. Without that, it is merely noise.
Duffy also emphasizes the importance of smart regulation, noting that customer protections must always take center stage. Markets work best when clear rules and common standards are in place, transparent and understood by all. Likewise, counterparties and market integrity matter a lot. During the last couple of years, as trading in meme stocks took off and the fear of missing out replaced due diligence and best practices, the extraordinary collapse of new assets such as cryptocurrency once again reinforced the reality we already knew: strong, effective regulation is non-negotiable.
Looking ahead, Duffy expects a whirlwind of geopolitical and economic hurdles to continue. For markets, that means it will be even more difficult to determine the highs or the lows. For investors, it will mean managing portfolios with the best information out there, knowing it may all change. With near constant market challenges ahead, effective risk management will be crucial. To navigate this new age of uncertainty, expecting — and planning for — the unexpected could be the differentiator that separates disciplined investment strategies from distractions.
In conclusion, Terry Duffy’s article highlights the importance of effective risk management in today’s environment of uncertainty and constant market challenges. Investors must face the reality that the markets are no longer one-sided, and investing requires more than just buying every dip. Hedging can provide certainty in an uncertain market, and smart regulation is fundamental to ensuring customer protections, clear rules, and common standards. Looking ahead, effective risk management will be crucial for navigating this.