Multi-asset: old systems can’t do new strategies

By Peter Hill, managing director, UnitedKingdom, Ireland & Middle East, at SimCorp 

Multi-asset investing, whileincreasingly being employed to diversify holdings and boost returns, is facinghuge challenges owing to technology shortfalls. Multi-asset managers, if theyare to make well-informed investment decisions, and understand and manage riskand profit/loss across their portfolios, require unprecedented quantities andquality of information. However, many continue to operate on legacy systems,built for simpler requirements in simpler times. 

One of the challenges with legacytechnology is the lack of automation and consequent poor access to data. Use oflegacy systems results inevitably in the proliferation of data silos, perhapsmarket, asset class or process-specific. Aggregating data from these silos intouseful information on which to base multi-asset investment decisions is adifficult and error-prone task. Doing it in a timely fashion may well beimpossible. 

The key piece of technology required formulti-asset investing is an Investment Book of Record (IBOR). An IBOR deliverscontrol over investment-critical information to asset managers by centralisingpositions across all asset classes, including cash, into a single version ofthe truth. It provides information, accurate to the second, about current,projected and historical positions, enabling portfolio managers and traders tomake better-informed investment decisions. Crucially – and likely to beimpossible to achieve using legacy systems – it includes not just today’strades but all transactions and events that happen intraday away from the frontoffice that nevertheless affect investment positions. 

This is extremely important; a firm’scash position, for example, will likely be affected by the pledging ofcollateral on a derivatives position. In a legacy system environment it isunlikely that a portfolio manager or risk manager will know about this pledgeand its impact on investible cash until some considerable time later, possiblyminutes, hours or even the next day. A similar, potentially more costlysituation would arise if securities were used as collateral but then traded bythe front office in ignorance of the pledge.

Uptake in the industry of modern,enterprise-wide systems that address such significant data challenges has beenvariable. There are enthusiastic adopters who have been prepared to invest intheir businesses and prepare for growth. These are outweighed by laggardsthough: trillions of dollars in assets are still managed worldwide on legacysystems. 

Moving off outdated technology onto new is not a trivial task andrequires significant commitment. There will always be people in a firm in whoseinterest it is to maintain the status quo. And one reason may be that at thetime buy-side margins have been squeezed, so tight technology budgets have beenallocated to adapting to regulatory change. So ironically, regulation chieflyaimed at reducing risk may have hindered the adoption of technologies thatwould better enable the use of risk-focused multi-asset investment strategies.

The investment landscape has changeddramatically in recent years. Many instruments that investment managers view ascommonplace today would have been considered exotic just a few years ago.However, the pace of technological change at many firms has not kept up withthis evolution. Now that firms are doing more in multi-asset, perhaps they’llfocus on getting to grips with their portfolio risk using technology that makesit easier. Shouldn’t investment managers that have sophisticated investmentstrategies have equally cutting edge systems?