Q&A with Scott Sherman

Global Head of Business Development & Sales, Imagine Software

IN CONVERSATION WITH HAMLIN LOVELL

In June 2015 THFJ visited Imagine Software in their New York offices, near Wall Street in the financial district.

HL: Imagine launched in 1993. How has the world of software solutions for asset managers changed over that period?

SS: Because our system is built to respond to market changes and client needs, we’ve been at the centre of a great evolution for software solutions. When we launched 22 years ago, our stock-in-trade was our real-time system. We have operated a real-time business since day one. And we were also the first to launch a cloud-based risk management system, back in 2000. As a result, we were able to offer, and we continue to offer, everything clients need to trade in our easy-to-use, cloud-based application. We handle the hardware, we handle the database, we handle all the data and we now have historical data going back more than 20 years. We manage business continuity planning and disaster recovery, and everything you can possibly need to succeed in the financial markets, so we make it easy for our clients, whether they are a large bank or a small hedge fund, to manage risk at the portfolio level – and at the enterprise level.

HL: How important is innovation in your industry?

SS: In addition to the cloud-based platform, I think that one of our greatest strengths is our ability to innovate. We have won awards for having the most innovative risk management system, and our clients consistently tell us that the pace of our innovation is second to none. One of my partners, Steven Harrison, who designed all of our software originally, and continues to make our offering unique, was named one of Institutional Investors’ Trading Technology 40. He has led innovation in our industry, and not just with the cloud, but by introducing a financial platform that allows our clients to build apps, dashboards and their own models – and use our system as an extension of their own technology – independently of Imagine or with us, as they like.

HL: Who were the founders of Imagine?

SS: Four of us founded the company – and we have stayed together for 22 years. My partner Lance Smith is our CEO; he has a PHD in mathematics and is a quantitative analyst. Dave Miller, our CTO has consistently, over 22 years, created the most innovative software functionality. Steve Harrison is our great developer and software designer, as well as the COO overseeing our operations around the world. And, as you know, I am the global head of Business Development & Sales.

HL: Can you customize risk guidelines to those contained in an offering memorandum for say a Cayman, Bermuda, Bahamas, or BVI fund that may have its own detailed risk guidelines? Do you customize guidelines for dedicated managed accounts, funds of one, and managed account platforms?

SS: We haven’t yet discovered a challenge for which we couldn’t develop a solution. We have historical data going back to 1987. We have the ability to slice and dice risk and portfolio management data to provide sound, quick and clean solutions for financial firms working in highly regulated areas of trading. Whether for UCITS in Europe or liquid alternatives for ‘40 Act funds in the US, we can help companies meet their compliance needs and manage their trading limits. We can show them before they make a trade whether that trade would breach a limit and we can give managers functionality to avoid breaching limits. We have created nicely streamlined dashboards for our managed account customers, which makes it easy for them to manage risk anywhere in the world, at any time.

HL: Who are some of the leading hedge funds that use Imagine?

SS: We work witha number of major hedge funds and asset managers around the world including Millennium Partners, Fortress, Cheyne, BlueBay, Henderson, Sandringham and Nine Masts in Asia. Many of our clients have confidentiality agreements, and we maintain those with the utmost respect.

HL: How do you integrate compliance with risk management? Why is real-time compliance important?

SS: Well, first of all, I think that most of us recognize the fact that compliance is driven in a big way by risk management. Regulators are trying to make sure that risk is properly monitored and that investors in various alternative vehicles are as safe as possible in today’s fast-moving markets. We have twenty-two years’ experience building major risk management systems that are used by banks such as Credit Suisse, Deutsche Bank and Bank of Montreal, globally for their own internal trading, for client trading and in their prime brokerage departments. We have all the technology necessary in order for clients to be able to respond to new regulations – and that is one of the factors driving our business.

HL: Does your system do pre-trade compliance to prevent breaches, as well as identify breaches after the event?

SS: Yes, and that is a very important part of our system, especially for asset management firms that now need to prevent the breach of limits in real time. Internally, at hedge funds and banks, risk managers must monitor traders that have internal limits. We enable them to monitor trades that might be approaching a breach, so that they can then alert the trader and together determine how to avoid that breach, and future breaches.

HL: Can the system handle complex derivatives such as exotic options or mortgage-backed securities?

SS: We provide a whole range of exotic products. We have a structuring tool for highly structured products, and we handle all of the major strategies – macro, event driven, long/short – too many to mention. Not only do we handle exotics and structured products natively in our system, but our financial platform allows clients to build their own dashboards of risk views for any products that they need to model.

HL: Which types of limits and breaches does your system monitor? For instance diversification, liquidity, leverage?

SS: Imagine conducts asset diversification tests, concentration tests, and virtually everything that is needed, for example, for UCITS regulations or ‘40 Act regulations etc.

HL: How often do SEC rules for ‘40 Act funds change, and how easy is it to update the system to the latest rules?

SS: For the SEC, this is a new era of regulation, because ‘40 Act Funds, for example, give alternative asset firms access to a broader retail audience versus just a qualified investor base. As a result, the SEC rules are evolving constantly so that the regulators can be comfortable that they have the right level of investor protection.

Our responsive technology platform allows us to keep pace with changes in regulations so that our clients can keep growing. And we are now able to put our very robust infrastructure into our clients’ hands so they can build custom dashboards with the functionality and models they require to respond to regulatory changes – with or without our assistance. We believe that alone is, and will continue to be, a great differentiator for Imagine going forward.

HL: Is your stress testing historical, hypothetical, or both?

SS: We have historical data going back as far as 1987, so clients can conduct all kinds of historical tests. We also provide hypothetical and Monte Carlo stress tests for up to fifteen factors at a time, so clients can perform stress-testing at the most complex level.

HL: Where funds have a short history how do you stress test for something like a 1987 crash – would it be historical or factor exposures?

SS: We can do both, and if by chance we are missing any data point, we can proxy that data using factors and similar securities.

HL: How can you create a stress test for an event such as Greece exiting the Euro, which has never happened before?

SS: Our system allows a user to stress test by position, so they can easily model the impact of a Greek exit or other market scenario on selected positions. As I mentioned, clients can stress test up to 15 factors at a time, and they can also custom build their own tests and create user-defined views.

HL:  Which methodologies can you use to calculate Value at Risk?

SS: We calculate historical and parametric VaR and random simulation as defined by the client.

HL: Does the system help to calculate and stress test margin requirements?

SS: One of Imagine’s great features is our rich collection of functionalities and the flexibility to deploy them to fit clients’ needs. For example, just as a client can slice and dice their portfolios, we can slice and dice our system to provide the functionality required by business or strategy. Our newest innovation for hedge funds is a flexibly designed margin module. This product enables our clients to calculate the margin requirement on a portfolio utilizing various exchange rules, Reg T. or even “house rules” that a prime broker would be using. And this functionality is integrated directly into our system. The margin requirement calculations can be invoked programmatically, and clients can now perform stress test such as, “What will my margin be if such-and-such occurs?” It is always better to anticipate, be prepared for and even avoid a margin call, especially in turbulent markets.

HL: Which other service providers do you work with on data aggregation?

SS: We create risk portals for prime brokers, data providers and others so that a client can see trades with prime brokers or fund administrators and have the ability to see, on a daily basis, a risk report that is calculated using the standard methodologies and all the historical data that resides in our system. Shanghai Wind Information, one of the major data providers in Asia, also provides our risk portal functionality to their own customers.

HL: Can you be precise about how Imagine helps with reporting requirements? Does it assist with Form PF, Form CPO-PQR, ADVs, 13Fs, and any others?

SS: We support all of the risk calculations that make it easy for clients to comply with regulatory reporting. We have risk apps for Form PF, Opera and others, and we help clients complete the risk portion for all of their regulatory paperwork, which we know is an ever-growing part of a firm’s administrative work.

HL: Besides regulators, whom else do you report to? For instance would you provide reports to fiduciaries such as trustees; or the governing body of a fund, which might be its board of directors or could be a depositary?

SS: We are involved with professionals at every level of the fund, from the trader on the desk to the risk manager and to the overall management of the fund and trustees. We also have a risk aggregation system that allows investors or funds of funds to review their investment in funds; investors may not have the same direct transparency that one would expect of an in-house trader or a risk manager, so we help investors make more informed decisions.

HL: Can Imagine also help out with Annex IV reporting to ESMA required by AIFMD, and various national regulators’ reporting requirements in Europe?

SS: Yes, we already do. And as you know, there are multiple flavours of requirements depending on where you are located and with various regulations, and we cover all of them.

HL: Can yoursystem also be hosted on a company’s own servers?

SS: Some of our major clients, banks, brokerages, etc., use the Imagine system in-house. We have also seen clients adopt our cloud-based system over the years, for example Bank of Montreal, which had an enterprise in-house system for years and then converted over to our ASP version with great success.

HL: Imagine is now 22 years old. How do you see the company evolving over the next 22 years?

SS: Imagine has come a long way in our more than two decade in business, and we now have offices in New York, Cleveland, London, Hong Kong and Sydney, so we see a very broad variety of clients in every geographic region of the world. We have grown because the flexibility and adaptability of our platform allows us create solutions for the most complex business needs – and then deliver them, very quickly, through a streamlined dashboard so clients can easily manage their risk, anytime, anywhere. Imagine is a sustainable platform that can respond to any market event and gives clients the ability to successfully ride through financial cycles.

Looking ahead, our ability to deliver that same degree of risk management complexity through portals to various clients through fund administrators, data providers, etc., is going to give all market participants a greater level of risk control. Whether it is a one-person hedge fund working with a fund administrator or a major international bank using our system to communicate risk with their many constituents, we can provide our portal technology across many different channels and to every type of client. Our ability to calculate risk per position so that a data provider, for example, can delilver a feed with defined risk parameters built into every position will, I believe, represent one of the great advances going forward for the financial industry.