Why firms need to explore options in selecting data management systems

More alternative investment firms are grappling with the need to improve the quality and timeliness of their reporting, largely driven by the shift to using multiple prime brokers, the complex registration process, and the growing sophistication of investors. Each firm has its own specific requirements for internal reporting and investor transparency, but they all share the realization that increased demand on their operations staff is costly and unsustainable, and for some, their reliance on spreadsheets has become too cumbersome and risky. While global multistrategy funds may have different needs than strictly U.S.- focused long/short equity funds, both types—as well as private equity, asset managers, and venture capitalists—have the same question: How can I better manage my data and get the information I need when I need it?

There are several types of systems that come into play when alternative investment firms are looking to consolidate reporting and aggregate data. The major categories are portfolio management, order management, execution management, portfolio accounting, and risk management. In most cases, these systems may send feeds to each other, but they are usually independent which necessitates the creation of manual or home-grown reporting using Excel or other applications. Older and more established firms may have a mosaic of systems stitched together by their software development teams, and they also may have created proprietary report delivery applications. To make the situation even more complex, the functionality these systems deliver is becoming less compartmentalized and there are significantly more overlaps. Below are definitions of categories of systems.

 

ORDER MANAGEMENT SYSTEMS
People are often frustrated that their order management system (OMS) doesn’t provide the robust historical reporting and tools found within portfolio management systems. There is a lot of convergence within the order management and portfolio management space, but the major order management players tend to stick to their knitting. They may dip their toes in the portfolio management space and offer some historical data storage, but their focus is on workflow and execution. On the other hand, the portfolio management vendors are making a play to capture more of the order management market share. Emerging managers, in particular, want to reduce costs as well as the complexity of their technology environment. If they can make do with lighter OMS functionality, they may opt to deploy one of these portfolio management systems rather than both an OMS and PMS. When it comes down to it, if you need the pre-trade compliance functionality, algorithms, staging workflows, and if your trader insists on it, you really can’t get away from having an OMS.

 

EXECUTION MANAGEMENT SYSTEMS
Execution management systems (EMS) give you more efficient access to multiple destinations, market data, and algorithms. They range from applications provided by your prime broker to third-party broker-neutral systems. Depending on your trading volume and the product you’re using, the EMS can be provided at little to no cost. In most cases, an EMS will need to flow into your OMS in order to allocate trades and generate end-of-day reports. Some challenges are integrating pre-trade compliance, as well as ensuring the instrument data in your EMS matches the reference data in your OMS or PMS. A decent amount of time can be spent updating pricing and symbols if the market data feeding your OMS/PMS doesn’t cover the world of instruments you are trading.

 

PORTFOLIO ACCOUNTING SYSTEMS
Bubbling up as the must-have for the start-up and existing alternative investment firm is the portfolio accounting system. There is some debate over the efficacy of shadow accounting, but the institutional money tends to follow the “institutionalized” firm and a portfolio accounting system typically helps make the case that an alternative investment firm follows best practices and is “institutionalized.” Start-ups are faced with the decision of increasing the complexity of their IT systems and the up-front cost versus the inevitable future implementation replete with historical data import headaches. Pay now or pay more later, but eventually, most funds will have a portfolio accounting system in some form or another.

 

RISK MANAGEMENT SYSTEMS
Within the alternative investment space there is a mix of internal proprietary and third-party risk systems. Again, to mention best practices, portfolio managers are expected to have processes and systems in place to help identify and mitigate portfolio risk. Many investors will push to use third-party systems to ensure that the firm is following a standard, as well as help the investor with their own reporting (the risk systems vendor may provide data across funds for the investor, which simplifies the investor’s data collection and reporting significantly).

 

SECURITY MASTER
One of the biggest challenges is ensuring that the reference data used in each of these systems are consistent. Over time, some firms have disparate data feeds delivering key, but different, instrument and pricing data to their systems that cause significant reconciliation issues. To solve this, they implement a security master to centralize all reference data. Each system pulls the data it needs from the single security master which allows the back office to make one correction and feed it to the rest of the downstream systems, as opposed to making the change system by system.

 

DATA WAREHOUSE
The term “data warehouse” is thrown around a lot and you may hear portfolio management vendors, order management vendors, and software development firms using the term. A data warehouse is designed to aggregate data from disparate systems and limits the dependence at the application level. In a perfect world (humor me, will you?), a well-designed data warehouse allows you to connect and disconnect systems without significantly impacting the downstream applications. The data warehouse normalizes the data from all your systems. It acts as a translator: Geneva speaks French; Eze Castle speaks English; Neovest speaks Spanish; your internal spreadsheets are some kind of Creole. A data warehouse takes all the statements from these systems, translates them to a common language, and packages the information in a language you can understand.

 

For some alternative investment firms, implementing a PMS adequately simplifies reporting and delivers the information they need, when they need it. Risk data can be incorporated within the PMS, as can portfolio accounting data, assuming the fund has a portfolio accounting system. Files from multiple prime brokers and fund administrators can be imported, and intraday and end-of-day reports can be generated.

 

The question of whether a data warehouse is required has more to do with your firm’s complexity, need to adapt quickly, and reporting requirements. Trading multiple strategies across disparate systems may require more horsepower than the typical PMS can provide. A data warehouse is also useful in environments with legacy systems. More often than not, you’ll want to limit the amount of investment and dependency on your legacy systems and shift the focus to a data warehouse. In this case, building a data warehouse would help you limit the number of direct connections to the legacy systems, and ultimately help with the decommissioning of these systems.

 

If you determine you need a data warehouse, then you need to ask, should we build, buy or do something in between? When answering this question, take into consideration your firm’s personality and the complexity of your requirements. In some cases, firms can modify some workflows and adapt to the commercial system. In others, the users will drive the decision based on their flexibility or lack thereof. Lastly, there are some cases in which there is just nothing on the market that will do what you need. In this case, it’s obvious you need to engage your in-house or outsourced development team. This holds true when selecting most systems (e.g., PMS, OMS, etc.) as well, given there may be some workflows or requirements specific to your firm that require a custom solution.