One Process Across All Functions and Product Silos: Moving Beyond Aspiration

Date: September 22, 2014

The pressure on hedge funds and traditional asset managers is not just being felt on the investment performance side: regulators are pushing managers to adopt more mature risk management practices. 

Buy-side firms are also starting to develop a holistic approach to risk management and are supporting that strategy with enterprise-centric investments.

Three-quarters of CEB surveyed asset managers are investing in improving market, counterparty credit, and liquidity risk management capabilities simultaneously. This is putting added pressure on their ability to deliver investment performance, which is yet another powerful driver for investment in adopting zero infrastructure data and analytics.

The root cause is all too familiar: fragmentation has become the de-facto operational and technical standard. Automation across our industry has been built on the mistaken belief that every type of financial product is unique in its domain expertise, workflow, and technology requirements. As a result of this, every asset manager and hedge fund has separate investment and trading groups for fixed income, equity, derivatives, and money markets (and more often many subcategories of each).

The barriers to a zero-infrastructure model are many, but as a first major step, our industry needs asset class and functional convergence to happen before a single process across product lines can be more than just an aspiration.

Building the business case for this industry convergence will happen because of front-office benefits, not just back-office costs. Because they can be driven by the same data content and risk models, CEB believes asset managers and hedge funds will increasingly seek to integrate portfolio modeling and risk analytics applications into a single portfolio analytics platform.

Beyond the obvious benefits of improved operational efficiency and data consistency, an integrated portfolio analytics platform can improve investment performance by improving collaboration between front- and middle-office stakeholders.

  • Portfolio managers can leverage access to more timely and interactive risk data to craft strategies that optimize risk-return tradeoffs.
  • Risk managers can develop a more holistic view of risk across the enterprise to quickly identify and mitigate sources of excessive risk.

To thrive in this competitive environment, managers must prove their value by delivering consistent alpha. Portfolio modeling and risk analytics technologies enable analysts and portfolio managers to improve their strategies over traditional manual or Excel-based analysis by providing them with the tools they need to identify and leverage the factors that contribute to a portfolio’s performance.

Although there will always be a market for single-asset class analytics solutions that serve specialized functions, CEB predicts that the ongoing trend will be the consolidation of discrete applications into end-to-end, multi-asset, multi-functional platforms.

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