Breaking Down Buy Side Barriers: Achieving Alpha through Agility

The choices an investment firm makes about their trading technology strategy can influence alpha generation. Having the most efficient, seamless solution can separate best in class asset managers and generate performance by allowing the front office to focus on their job, without the distraction of having to wait for data issues to be resolved. In today’s environment, firms that are struggling to make do with legacy technology that is poorly integrated will pay the price in terms of trade errors, opportunity costs and compliance breaches.

During the course of our outreach to buy side firms, both traditional and hedge funds, we identified five main strategic approaches to constructing an IT infrastructure to support the front office. Each IT strategy approach has its pro’s and con’s (with the exception of having no strategy), and its devotees and detractors, but one thing is clear – investment management firms of all sizes and types need immediate access to accurate gold copied positions and cash balances across all of their systems – trading, performance, risk, accounting.

Our research identified several obstacles to alpha generation experienced by asset managers during the course of their day ranging from difficulty in completing their pre-trade compliance checks, errors in executing target asset allocation weightings, and pain in implementing new geographies and/or new instruments given their current system architecture. However, the most significant barrier to an error free trading environment, and to trading agility is the reflection of incorrect share positions and cash balances in front office systems. Greater than 50% of buy-side firms experience trade errors, mainly caused by incorrect position or cash data across separate front, middle and back office systems. Fixing these ‘unforced errors’, takes up valuable front office time which would be better focus on alpha generation than error remediation.

As part of our outreach effort, we asked traders and portfolio managers to rate the benefits of having a single view of their positions across the enterprise. Not surprisingly given the number of trade errors caused by inaccurate trading cash and positions, the vast majority ranked these attributes as the having the highest benefit. Having the same positions reflected consistently across trading, compliance, risk, accounting, performance measurement systems, and therefore used in all calculations being built upon the same data, is clearly not something that portfolio managers and traders currently take for granted.

Asset managers should not accept compliance breaches or trade losses due to data errors – or the time spent by their senior staff on fixing them - as a cost of doing business, nor should they settle for any solution that diverts them from their objective of achieving portfolio returns. Investment managers place a high value on having access to accurate trading positions and cash balances when evaluating their technology infrastructure, and should not accept anything less.