All of us in the portfolio/fund management technology world keep wondering, what’s the next technological wave which will sweep and change the tech landscape. The prime reason for this keen interest is because, there is very little innovation and change which happens in the fundamental operations of these businesses. A Fund is a Fund since the birth of the concept and a portfolio is a portfolio, and there are only so many ways in which it can be looked and analyzed, and we've got multiple systems which do it in today's times.
In the early 2000s, everyone wanted an STP front to back office operation, after a few years they wanted to move from thick client architecture to thin client architecture and by 2009-10 the buzz word was outsourced middle and back office operations (a mix of man and machine technology); so the question everyone seems to be asking is what more can technology deliver to us?
I was reading this fascinating article on “Big data” on the WSJ. It spoke about how a handful of cutting edge companies were helping firms comb through terabytes and pentabytes of data with intelligent algos to aggregate and identify hidden pockets of brilliance. I strongly believe this could potentially be a trend if harnessed properly by Fund/ portfolio management firms also.
Specific to the Middle East, and when the topic of discussion is large AUM asset managers, most of the back office operations systems have now been in place for a good decade+ in several organizations. Every year, several thousand transactions go into the back office database from the transaction side. From the CRM side, wealth management pumps into the database another few thousand disjointed demographic information points. Then there’s of historical prices, exchange rates, research notes etc which go into the system from a multitude of sources and reside unused except for the occasional historical unrealized gain loss report which is requested by the CEO or COO.
Here are a few thoughts which I could figure out from the limited reading that I did over the holiday season on self learning and programmable Algorithms.
There are several types of algos which are used by data analytics firms, and some of them could also find use in the asset management industry. There are “Anomaly detection algos” (in simple terms, a string which could be used by companies to identify “Is this investment transaction in pattern, or out of pattern; does it match typical portfolio manager/ trader behaviour, or not?”) and then there are Classification algos (Is this out-of-pattern activity fraudulent, or not?). The potentials are endless. From a no-brainer idea of trying to avoid an "Adobili scandal" , to analyzing your past data to help understand why loss making deals were done in the past , and maybe even learn from the mistakes and avoid such mistakes in the present and future. Now imagine if you could insert such a string into your pre/ post-trade analyses and they could be used by your middle office to comb through fewer transactions thereby reducing your workforce in the middle office compliance function.
Then there are “Clustering algorithms”, these could be used by asset management firms to better understand client behaviour from all the disjointed demographic information stored in the databases. Eg: What other people is this fund investor of yours most like? If you were to mix a Clustering algo with a recommendation algos (k+nearest neighbor algo) you could arrive at even better intelligent decisions like, What fund or ETF would this customer be most likely to accept!
I strongly believe this is the next big leap which all large cap asset/ fund managers would want to make. The technology systems are already out there. They are being cleverly used by firms in the retail FMCG industry, credit card fraud management industry, automotive industry etc. It is only a matter of intelligently adapting these technologies to suit into our industry.
The fundamental building blocks to reaching this state start with having a strong back office and single book of records. Having multiple back office systems is not a major impediment (as long as you have the money to spend in integration), however a single book of records ensures that these systems can be easily slipped into place when the time is right.
Ladies and gentlemen, This is our next frontier in the buy side space ...to borrow a phrase from Star Trek "to explore strange new worlds of (unstructured Data), to seek out new (alpha)and new (client needs), to boldly go where no man has gone before"
