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Investor stress may turn to distress
Investors need to be more prepared for an environment of prolonged stress, if not distress in markets, according to the findings of a Watson Wyatt conference held in Melbourne this week.
The conference was told that Watson Wyatt believed the current crisis in investment markets was caused by a combination of the proliferation of overly complex financial instruments, excessive faith in markets' ability to price risk correctly, a lack of effective regulation and industry remuneration structures that overly rewarded risk.
It said all of these factors had been exacerbated and magnified by the highly globalised nature of the finance industry.
"These elements are unlikely to be resolved quickly or easily," the conference was told. "Therefore, investors need to be more prepared for an environment of prolonged stress, if not distress, in markets."
Watson Wyatt's global head of investment consulting, Carl Hess, outlined the events that preceded the current global financial crisis and said with hindsight, many market participants should have been able to see the crisis coming.
He said this in turn raised the question of why so many red flags were ignored.
AUTHOR
Mike Taylor
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