Saw this article in The Trade referencing Marshall Saffer (who used to be with FMC out of Toronto before it was swallowed up and became an “also ran” by a company that shall remain nameless) and we couldn’t agree more.
The article focuses on hedge funds, but we’ve seen that it rings true for the traditional institutional buy-side segment of the market too.
Read the article:
Taming the Big Data Bronco
Asset management firms often contain internal silos, with portfolio managers and trading desks using their own separate data to make decisions. That needs to change, according to Marshall Saffer, COO of technology and business consultancy firm MIK Fund Solutions.
Earlier this year, MIK Fund Solutions carried out research into the way US hedge funds use data. For Saffer, one of the key insights was that many of the internal systems at these firms, from accounting to risk systems and even trading desk tools such as algorithms, were not connected to each other. In addition, these systems were often overly focused on individual transactions, making it difficult to work out how they related to the company’s overall objective – generating alpha for clients.
“Most firms do not have an integrated data layer that brings together all of the input from their various systems and translates it into something that PMs, CFOs, and COOs can relate to the bigger picture,” he says. “They get by, but they’re relying on individuals rather than an efficient system to manage their data and inform their decisions.”
Command of information has always provided an advantage to portfolio managers who could use quant-driven insights to develop their investment strategies. However, MIK Fund Solutions’ research suggests that much information currently available is underused. The firm’s most recent paper, ‘Using Every Bit to Byte: Leveraging Data to Generate Alpha’, found that many fund managers never use the data resident in the firm to inform their strategy or investment decisions. The research concluded that the main problem was that there is often no mechanism for reconciling internal databases with external sources of information.
“Communication between portfolio managers and trading desks needs to improve,” says Saffer. “Internal data on risk, accounting, and historical performance should all become a part of portfolio manager decision-making. Both parties need to bring their data together and use it to generate alpha.”
Investment institutions have had to deal with increasing quantities of information in recent years, as reduced average trade sizes, market fragmentation, and the rise of high-frequency trading have all contributed to pushing upmarket volumes and especially message traffic far above levels seen five years ago.
As the need to process more and more data has increased, buy-side firms have been forced to expend more resources on their technology systems. Saffer is concerned that this has led to a “cost-focused” mentality, in which asset management firms view data as a drain on their resources, rather than an opportunity to generate returns.
“Data should not be viewed as a cost,” he says. “It is there to help you generate alpha. Building up that infrastructure is investing in your future. It is a powerful tool that should not be underestimated.”
Knowledge Is Power
Already, systems are being developed that can help institutional investors reconcile their data and processes to produce more efficient decisions. MIK Fund Solutions offers a data warehouse service that consolidates portfolio-related data in a single location, as well as a real-time portfolio monitor designed to help PMs keep track of their exposure. Meanwhile earlier this month, trading software and services provider INDATA launched a product called iPM Connect, which allows users to integrate their research management tools, together with portfolio management, reporting, and customer relationship management.
Saffer believes that building a more connected, more collaborative business model that draws on all the information available to the collective parts of a firm could be the key to success in a competitive trading environment. Firms that embrace ‘big data’, drawing it together to inform trading decisions, will be able to outperform their rivals and generate returns far faster than those that continue to allow siloes to exist within their ranks.
“The more information available and the closer that information is to decision-making in real-time, the better the decision,” says Saffer. “Portfolio managers exist to add value through their investment strategies. Every information advantage could make the difference between success and failure.”