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Executive summary:

• We believe that the best way to manage real-time risk during a transition event is by having heightened awareness of the potential for market volatility and reduced liquidity, in addition to working with a provider with robust derivatives and physical trading capabilities that also has the ability to combine these capabilities across numerous mandates.
• During Q4, we believe there is an elevated risk of market volatility when monthly U.S. inflation data is released, quarterly earnings season begins, and major central banks meet.
• During Q4, we believe there’s likely to be reduced liquidity in markets around the U.S. Thanksgiving holiday on Nov. 23-24, as well as in late December due to Christmas and New Year’s.

Planning on implementing a large portfolio change in the fourth quarter? You’ll want to pay attention to this calendar.

As we’ve shown throughout the year in our quarterly real-time risk exposure reports, when it comes to transitioning assets within a portfolio, time is of the essence. That’s because real-time risk occurs at a much faster scale during the implementation phase, making every hour—and even every minute—matter. Case-in-point: During the second quarter of this year, one market hour of misaligned U.S. large cap equity exposure had a standard deviation of +/- 27 basis points (bps). For international developed equities, that number rose to +/- 31 bps. For U.S. Treasuries, it was a tick higher, at +/- 34 bps.

So, how do you manage this real-time risk when moving money in and out of your portfolio? We believe that the best approach is a combination of heightened market awareness and access to a provider with robust derivatives and physical trading capabilities that also has the ability to combine these capabilities across numerous mandates.

While market behavior is impossible to predict in the short term, we believe there are some days we can identify in advance of each quarter that have the potential for elevated market volatility or reduced liquidity. For instance, there is often increased risk on the days surrounding central-bank policy meetings, as well as on the days when large banks and big tech companies release quarterly earnings reports and forward guidance. Reduced liquidity, on the other hand, is typically observed around national or global holidays or celebrations—especially during the end-of-the-year holidays in late December.

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