Empowering Talent with Cutting-Edge Investment Technology
So, your hedge fund or asset management firm has managed to recruit and sign an all-star roster of analysts and traders — no easy task in today’s talent acquisition octagon.
- What will happen if these ingenious investment professionals get frustrated working every day on old platforms that prevent them from timely reporting of portfolio performance to investors or from pulling accurate risk exposure reports?
- What happens when a portfolio manager within a multi-manager platform fund receives errant expense, performance, and fees attribution and allocations data?
- And, what if managers don’t have the tools to outperform benchmarks and deliver risk-adjusted returns that their clients expect?
Investors are well aware of the continuing tussle for talent and are equally aware (and frustrated) they may be paying for this talent shortage and the rising performance and management fees that come with it. Returns are not keeping pace and allocators are retrenching. Business Insider reported that “This shortage is pushing the industry to a breaking point.”1 Incentivizing talented traders with fixed fees and guaranteed payouts is one thing.
Firms that give talent the tools to succeed... that’s the thing. Technology debt is now detrimental to competitiveness. It’s the difference between chess and checkers.
Here are some compelling reasons why investment managers should rush to replace tedious manual processes with AI-driven automation and data infrastructure that turns a morass of unstructured information into actionable investment data. Let’s shine a magnifying glass at the investment lifecycle to see just what the problem with manual processes is.
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Master the security set-up
The security master is the foundation for all other processes, a centralized repository of investment instrument data that provides a comprehensive view of all securities of interest. It contains essential data including identifiers, non-number information (like sector and ratings) and numbers (like coupons and risk ratings). This requires multiple data models often supported by numerous best-in-class systems for equities, derivatives, bonds, currencies, interest rates, equity options, mutual funds, indices, and credit securities.
The security master is a core component of a firm’s investment ecosystem. While front, middle, and back offices each use data differently to accomplish distinctive tasks, a unified source of securities data substantially increases opportunities for growth and decreases repetitive comparison between datasets. And, it prevents mistakes.
The high cost of manual errors in portfolio management
When investment operations are executed manually, a missed keystroke can become a catastrophe. If a person “fat fingers” a single decimal incorrectly, they could be making an error in payment, pricing, or calculation by an entire order of magnitude. For example, a coupon calculation in a fixed income portfolio on a $100 million bond position, based on an errant coupon rate in the security master, could result in an egregious overpayment of $10 million.
Manual errors in sector exposures, risk weightings, and compliance classifications arenas are worse still. If a person at a private market fund enters the wrong sector classification for, let’s say the auto industry, suddenly their sector weight is off. The portfolio manager has an incorrect view of risk and exposure, making allocation decisions under the impression that they are overexposed to the automotive industry and underexposed to, let’s say, real estate. But in reality, it's the opposite. Without accurate sector classifications, credit risk indicators, and liquidity flags, investment firms risk misallocating capital, violating regulatory rules, and mispricing portfolios.
Automation makes everything speedy and more accurate when comparing information from multiple sources. You can have hierarchies for your sources so that you can be intentional about how you choose what information and where you put it. If you have some complex waterfall logic that's impossible for a human to remember, it'll just happen automatically.
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Outdated technology is holding investment firms back
A trader or analyst keys in the wrong price, while a fund accountant puts in the wrong counterparty. These incorrect execution and trade mismatches lead to undesirable effects including slippage, market impact, or compliance breaches that come with monetary penalties. The processing of inbound transactions begs for automation, especially with the influx of systematic managers using AI algorithms and more trading people moving towards higher volume businesses.2 Manual setup of transactions and manual trade capture takes a long time. High-volume funds need to be automated to avoid hiring a dozen people who solely focus on processing trades. It's not sustainable from a financial or talent acquisition standpoint.
Automation in pursuit of T+0
With less time between trading and the settlement cycle to perform post-trade processing, eliminating manual processes and maximizing automation across pre-settlement processes is key. Everybody is in pursuit of T+0 to best manage liquidity and counterparty risk. But without real-time clearing and risk management, this can become onerous. Many smaller firms that do not have global teams are asking middle-office staff to stay late and work extra hours, another unsustainable approach. If you have a manual settlement process, there is only so much you can do. But if you are auto-confirming trades, the operations people are only tasked to where important issues need attention. Further, they don't have to manually go and send the notification to the custodian when it's done. When the trade is confirmed, it just goes out to them. Done and done.
Enhance risk management and accuracy in lifecycle events
If not processed correctly, corporate actions and lifecycle events can cause misstatements in holdings, valuations, and risk reports. In another operation that leaves little room for error, the manual processing of stock splits, M&A, or bond redemptions risks must be executed on the right day, at the right time, before trading starts again. Manual errors lead to incorrect P&L calculations and exposure mismatches, overstatements of assets, incorrect NAVs, or bad valuations. Imagine the ramifications of an imprecise valuation. Once again, AI-powered automation saves humans considerable time spent rifling through every price movement or position change to find outliers. In September 2024, Macquarie Investment Management Business Trust agreed to pay nearly $80 million to settle charges from the SEC that it overvalued approximately 4,900 illiquid collateralized mortgage obligations in 20 advisory accounts between January 2017 and April 2021.3
The higher the volume of business the greater the likelihood of damaging errors. With automated processes, portfolio managers are automatically notified well in advance when they have an election on deck. Cash management and reconciliation automation is another critical risk management advantage to be gained through advanced technology. Institutional asset managers need precise settlement date-based cash forecasts to ensure liquidity.
Operational efficiency prevents costly mistakes
While prime brokers on contractual settlement agreements will cover hedge funds, asset managers get charged overdraft fees if they miscalculate cash balances and don’t have enough funds to cover outgoing payments. If their reconciliation on their cash is wrong, they might get an unexpected overdraft fee ranging from 50–250 bps per day on the overdrawn amount. Hedge funds don’t get a free pass either, as their overspending means they need to borrow more cash, paid for with financing.
Modern cash management automation that prevents overdrafts also empowers portfolio managers to have more cash to trade. Instead, portfolio managers wake up each morning to everything fully reconciled, all corporate actions auto processed, with no unencumbered cash. They have their cash number, and they can work with a greater degree of confidence. Data quality suffers when processes are manual, because people either expend too much time to check everything or they don't have time to check anything at all.
Empower talent to spend less time on non-revenue generating tasks
Instead of hiring new people or asking people to work longer hours, buy-side firms can get more productivity out of their people — and keep them from jumping to another fund — by giving them cutting-edge investment technology so they can use their skills to impact the bottom line. More people are able to use advanced technology, which presents an opportunity to design your back office with automation, high data quality, and high-risk mitigation. Even better, self-service tools empower users because they don't have to rely on vendors or their tech team; they can make their own rules and customize according to their own departmental use cases.
A case for AI-powered automation in investment management
Starting from the security setup to trade capture, lifecycle events, through to margin management, by empowering middle- and back-office professionals to do their jobs with more accuracy and speed, a firm is also empowering the front office with the right information in real-time, giving them time back to be innovative. Portfolio managers no longer need to trade with fingers crossed, in hopes the downstream data is correct. Moreover, advanced investment lifecycle technology inoculates a firm against the occasional fat finger problem any of us may have on any given day.
Key takeaways
1. Why is outdated technology a problem for investment firms?
A: Manual processes lead to errors, inefficiencies, and compliance risks, reducing firms’ ability to generate competitive returns.
2. How can automation improve security setup and risk management?
A: Automated security masters ensure accurate classifications, preventing misallocated capital, regulatory breaches, and valuation mistakes.
3. What impact do manual errors have on transactions?
A: Fat-finger mistakes in pricing and trade execution can lead to financial losses, compliance issues, and reputational damage.
4. Why is T+0 settlement critical, and how does automation help?
A: Faster settlements reduce liquidity and counterparty risks; automation enables real-time trade confirmations and risk management.
5. How does automation enhance operational efficiency and talent retention?
A: It eliminates time-consuming tasks, reducing errors and empowering professionals to focus on strategic investment decisions.
References:
1. Saacks, Bradley. “Hedge Fund Investors Are Fed Up of Paying for the Industry’s Talent War.” Business Insider, August 19, 2024.
2. CFM. “AI in Investment Management: Separating Hype from Reality.” September 2023.
3. U.S. Securities and Exchange Commission. “SEC Charges Advisory Firm Macquarie Investment Management Business Trust with Fraud.” September 19, 2024.
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