Driving Institutional Credibility

An introduction to the five S’s of Software as a Service

BRANDEN JONES, LIQUID HOLDINGS

Institutional credibility is a ubiquitous term in the alternative investment community. While traditionally this has focused on pedigree and performance, active and repeatable controls and infrastructure are now part of the conversation. The definition of ‘credible’ is changing. Today, institutional credibility means more than showing the sell side that you are a worthwhile partner. Multi-prime strategies have changed counterparty requirements – as fund managers make unique decisions about operations and capital specific to their fund, rather than what is required by a single prime broker.

Not only do funds rate and score their counterparties based on several factors, but transparency requirements from investors have shifted focus and decisions to be more aligned with various subsets of interest groups in the trade life-cycle, viz. institutional investors.

Thus, a new equilibrium is arising where funds, counterparties and investors are working within a world that is flat — one where funds must collaborate on all sides with an ecosystem that sits in and outside of the front, middle and back office. With funds sandwiched in the middle, remaining viable and credible comes down to proactively managing relationships.

As institutional investors continue to carve out larger roles in their partnership with funds, it will be incumbent on managers to optimize their day-to-day fund management, and the increasingly complex management of investors. And, as the end of sell-side proprietary trading draws near, dripping new, unexpected entrants into the alternatives community, a crowded marketplace will only make it more difficult to vie for investor allocations.

Despite these pressures, the right technology can be an efficient solution for fund optimization that not only enables alpha in a fragmented environment, but demonstrates the capabilities necessary for more collaboration with investor-partners and, ultimately, smarter relationship management that encourages both retention and runway.

Institutional investors look for a broad set of capabilities from their partners, in an infinite world of options and competition. As the hedge fund industry grows in terms of size and complexity, they not only expect higher standards of communication from a fund, but better, smarter, faster and cheaper ways to make decisions and gains. In a period of technological convergence, both in mainstream and financial technology, SaaS (Software as a Service) models provide the greatest flexibility to enable institutional credibility for funds, for sell-side partners and for institutional investors. However, while technology is converging, the market for funds is diverging and changing due to regulation, new instruments, and questions around transparency.

These competing factors – convergent technology and divergent markets – require a very specific alternative investment operating system that simultaneously lowers overhead costs while posturing for a higher watermark. Thus, when funds implement a vertical SaaS solution as a core part of their infrastructure, it should be reinforced by the five S’s of SaaS – the critical indicators for institutional credibility and smarter relationship management: speed, service, scale, syndication, substantiation.

The five indicators
Speed

While much maligned through recent hype, speed is still one of the most important differentiators. But speed is not just about algorithmic capacity, or low latency. The infrastructure a fund uses can impact its relationships with investors, broker/dealers, and primes through capabilities like real-time reporting, and shortened response time to questions and mandates from investors, in addition to capitalizing on market events or new strategies.

Investors today view unforeseen disturbances as part of the new normal, and in order to keep and increase allocations from entities like pensions and endowments, funds must demonstrate that they can actively mitigate or take advantage of volatility through operational switches at the right moment.

But taking advantage of disturbances can only be successful through tools that provide a higher standard of service, the latest software – for faster turn-around without disruptions to fund activity or additional operational costs. Cloud technology allows these updates to be made seamlessly across a single platform that hosts multiple functions critical to many organizations. But not all cloud technology is created equally.

Some firms will claim “cloud” capabilities because they might run multiple versions of software (a collection of past and present versions that are unique to each client) in a Pennsylvania data centre, but this single-tenant architecture requires client-side IT for data management, upgrades and systems interactions. True cloud technology solutions are intrinsically multi-tenant — ensuring up-to-date and ongoing operations without redundant or expired software versions.

Further, workflow from investing to client relations, or even office to office, can determine speed of operations. When funds rely on infrastructure powered by a single database, data can move seamlessly and accurately across order, execution, and risk management through to compliance, reporting and shadow NAV. For funds, speed is often about drawing a straight line from market changes to investment decisions – and a true cloud solution can remove the road blocks that hinder many portfolio managers from taking advantage of activity or mitigating risk faster, smarter, and cheaper.

Scale
New entrants continue to create a crowded marketplace, with the industry tipping at $2.8 trillion AUM and 9,000 single-manager hedge funds globally. ‘Volcker’d out’ and hungry for allocations, emerging funds will need to quickly and actively demonstrate institutional credibility – while established funds will need to compete with emergents – keeping overhead low while achieving the next watermark.

Complicating this market squeeze is the need for funds to take advantage of new instruments and investment strategies that will give them a leg up longer term – beyond the battle in vanilla securities. As the market becomes more complex with new and established funds, legacy technology will complicate the scalability equation by restricting the functionality funds can utilize to compete and comply. Eliminating the technology barrier to entry while simultaneously putting new strategies on the table will determine which funds succeed, which funds operate at minimal or zero profitability, and which funds close.

What’s more, the fewer legacy technology issues a firm encounters, the less the financial burden required to mitigate growing pains, as a fund tries to incorporate old systems into new ones, or new systems that don’t play nice with counterparties or their primes. The cost of hosting legacy infrastructure can create entry barriers. A true SaaS solution helps to remove those hurdles with world-class data centres that ensure high performance and scalable infrastructure for clients.

Service
For funds, service is a two-lane highway that not only refers to their relationships with investors and primes, but also the relationship with their vendors. Service is a new facet of institutional credibility that is multi-directional for funds – and vendor management is the other seat of the seesaw that minimizes costs and enables access to the tools to stay competitive.

This ongoing balance boils down to four indicators of a successful vendor/client relationship:

  • Access: having the capability to hold and push the activities funds need for day-to-day and long-term development; providing 24/7 support on and off-site.
  • Agility: upgrading systems in a seamless fashion, without disruptions.
  • Security: creating the right partitions and protocols to protect fund and client information, remain compliant with new regulations, and host infrastructure in the most secure data centre environment.
  • Trust: that the vendor can solve issues and keep your fund’s infrastructure stable and competitive.

The right vendor can not only provide you with true cloud technology, but also the service needed to keep your team focused on investment decisions and client relationships. Ultimately, funds need to institutionalize their businesses without increasing footprint. Managers should look for technology and service partners who use the most advanced data security, storage, and value – so that institutional credibility is simply a fact of intraday business – not a white elephant for the fund.

Syndication
Outside of the internal requirements for institutional credibility, funds must also show their capabilities within a broader ecosystem of third-party alignment. This is the ability to prove to investors and regulators that risk is mitigated through multi-prime strategies and emphasis is being placed on investors as partners.

Syndication is collaboration – a careful set of maintained relationships of vendors, providers, brokers, and investors that create an environment where cross-selling, referencing, and product development are core tenets of a larger credibility collective. A SaaS platform purpose-built to manage the investment process soup-to-nuts eases the burden of utilizing multiple platforms and vendor relationships to facilitate the necessary workflows associated with trading and allocations.

When multiple custody relationships come into play for an organization, allocation automation and a single, real-time book of records becomes a requirement to maintain and enhance relationships across the ecosystem of hedge fund providers and investors.

Substantiation
While the asset management community becomes more and more comfortable with cloud technology — seeing the benefits to remain nimble and hunt alpha in real-time, all the time and everywhere — it’s what is in the cloud for these businesses that will set them apart from legacy tech and frankensteined infrastructures. The right cloud technology will not only enable activities but substantiate with what’s under the hood:

  • Data security: what a vendor deploys is important, but where they deploy is critical to a fund’s security – the ability to partition client information and keep data safe.
  • Real-time access: the engineering of the analytical systems deriving results can no longer be end-of or intra-day; staying ahead of the curve and your peers means having access to data and results that take into account the latest market moves.
  • DR/continuity: a vendor should allow for 100% up-time supported by a disaster recovery solution that will ensure connectivity during outages and catastrophes; no fewer than three instances of every critical component should run in parallel in different geographic locations to serve as a mirror copy of one another in the case of failure at one location.
  • Connectivity: low-latency access to the counterparties and exchanges you transact with serves as the blood line of your investment management process; where a vendor is hosted is as important as what is hosted, and your business cannot afford latency or points of failure to creep into the investment process.

The outputs of these internal, architectural, and unseen levers become transparent by sharing portfolio and investor information in real time with team members that may be geographically dispersed, and showing results to investors with the flexibility of using static views or views that update with the latest underlying data and transactions.

A new operating system
The asset management industry continues to transform through the potent mix of new laws, more competition, calls for greater transparency, and diminishing fee models. While pedigree and performance are still key, technology remains a differentiator amidst these challenges. And while the industry continues to innovate and move forward, specific and tactical software can be applied to ultimately legitimize partnerships, sustain operations and generate alpha – all while actively engaging with investors. However, the type of operating system that a fund implements will determine whether those three activities contribute to institutional credibility or ultimately diminish runway and capital.

As investors continue to join the table and provide constructive feedback, investment managers will need to respond in kind, with proper resources that enable speed and stability — all through the technology choices their managers make to forge stronger relationships within the framework of a larger, collaborative ecosystem.