The Technology Wake-up Call for Hedge Funds & Asset Managers: Top 3 Priorities for Optimal Performance


Martin Toyer, Vice President, Numerix

Three technology priorities institutions need adopt to achieve optimal trade execution performance

Over the last several years, asset managers have lamented about investing in a period of near-zero-rate central bank policies, global political and economic uncertainty, in addition to new industry regulations. Hedge funds, in particular, have seen their craft being undermined and overly challenged. With what seems like even more uncertainty on the horizon—Brexit, deregulation, low volatility, currency risk—one thing is for sure: alpha generation has become increasingly elusive.

Looking forward, can uncertainty equal opportunity? And taking it even further—can superior technology be an enabler of opportunity?

From our point of view, yes. At Numerix, we believe this is your technology wake-up call. The buy-side needs to radically alter its technology and risk management landscape.

However, it’s easier said than done. Technology expenses have increased dramatically and rapidly. Upgrades to new versions of software are an operational nightmare—and expensive. That doesn’t even include the opportunity cost of systems going down or severe delays in fast moving markets, often at the worst possible moments.

Most firms are also essentially playing catch up, scrambling to outfit their operations with technology that conciliates both regulators and investors.

Increasing market complexity and other challenges are putting pressure on hedge funds and asset managers to streamline their operations, enhance efficiency, and improve functionality, front to the back office. As a result, the technology needs of today stretch across software, hardware and infrastructure.

Today’s best practices include fintech players stepping up to play a supporting role. Market, business and regulatory changes are fueling a need for superior technological innovation that buy-siders can heavily lean on—for portfolio, risk and operational management. For example, one key influencer to this technology demand is that regulatory rules and risk management concerns are driving a more elevated use of OTC derivatives. However, many buy-side firms don’t have dynamic enough infrastructures to cope with derivatives trading and generally are not implementing the appropriate processes or systems to most effectively manage these instruments.

As they slog on, portfolio managers are coming up against trade risk analysis that’s slow or non-existent, which hinders trade execution and can potentially compromise risk exposure. Risk reports are often generated too slowly to be useful for risk management in fast changing markets. If risk analytics are inaccurate, hedges will be wrong and the bottom line is impacted. Additionally, much of the front office still relies on manual processes and Excel spreadsheets to handle derivatives, which means a completely disjointed view of risk and insufficient front-to-back operational workflow—something that’s essential to handle complex products such as derivatives.

Working with a range of asset managers and hedge funds, Numerix’s experience has led it to recommend three technology priorities institutions need adopt to achieve optimal performance:

1. Streaming real-time performance

The ability for all risk analytics, as well as P&L, positions and shadow NAV, to be updated in real-time as the market data feed streams into the system, updating continuously—and immediately—with each change in market prices. These lightning-fast analytics can be especially valuable to traders and portfolio managers for pre-trade decision support in fast-moving markets. Tools such as graph architecture enables streaming real-time performance that’s event driven, distributed and fault tolerant. This type of graph framework allows for high performance, scalability and minimal downtime; decoupled components become more extensible and cost effective.

2. A flexible and customizable dashboard

A platform that includes a workbench with real-time data feeds and pricing and risk functions so users can design and build any kind of real-time dashboard they need. From basic market monitors, to curve analyzers, to scenario analysis grids, to real-time risk and limit alerts, with this type of functionality hedge fund managers can use their imagination to build whatever they want. Unlike spreadsheets, a workbench of this nature can track all changes plus provides full access and collaboration control to dramatically reduce operational risk relative to spreadsheets.

3. Cloud-based delivery

A hosted technology platform in a private cloud can facilitate rapid installations, streamlined updates, high operational efficiency, improved support and offer a lower total cost of ownership compared to on-premise software. A SaaS delivery model means easy and rapid deployment with no local software to install or maintain: good news for you as well as your vendor. It gives you access to high performance software that is scalable and capable of handling large/complex portfolios across many asset classes.

A well-designed and complete technology infrastructure can answer a lot of challenges hedge funds and asset managers face today. All firms are increasingly seeking real-time risk solutions. In fact, a recent survey1 found that 89% of managers cannot see on-demand performance and risk figures based on the latest positions and intra-day market data, but need such data.

Automation wherever possible means operational efficiencies are achieved and operational risks are reduced. The technology urgencies we’ve outlined should not be put on a wish list, or bucketed as the holy grail of technology achievements, but should be deeply considered and prioritized into production.

1March 2016 SimCorp and Tabb Group survey of 34 North American firms: http://tinyurl.com/jna2lpf

About Our Expert

Martin Toyer joined Numerix in January of 2017 as Vice President. He has dedicated his career to developing technology solutions and risk tools for the financial industry. Prior to joining Numerix, Martin was the founder and CTO of TFG Financial Systems, which provided institutional quality platforms for cross-asset portfolio and real time risk management to hedge funds, asset managers, and banks. Previously, Martin was a manager of a team of developers at a tier 1 investment bank, where he was responsible for real time pricing of European bonds and interest rate swaps, in addition to developing the risk analytics and systems used within the bank’s global risk management architecture. He holds a Mathematics degree from Brasenose College, Oxford University.

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