Cloud providers are able to leverage large-scale technology, infrastructure and data centers and build new, sophisticated and scalable applications at optimal speed. Awareness of this has led to increased innovation in the investment management industry and, in turn, has led some of the biggest banks, asset managers and hedge funds to rethink the way their workloads are managed at the front, middle and back office level.
Until recently, the investment management industry had remained largely unchanged, with most traditional firms offering similar investment products and services to support their clients. To attract new investments and differentiate themselves from their competitors, managers must experiment and build new strategies that generate alpha. This has been difficult over the past few years in an environment of low margins, low yields and low interest rates, as well as passive investing yielding double-digit year-over-year returns. This has led to increased competition, tighter regulation, and operational challenges — all pressure points that cloud providers can help alleviate.
To keep pace with this increased competition, investment managers are using technology, namely the cloud, to expand their services and capabilities to serve and attract new client groups. Driving automated services such as robo-advice or risk extinction, investment managers with cloud capabilities can effectively enable the consumption of greater volumes of data, increasing their data signals and making new decisions. interesting and better from the derived information for their customers. Before the cloud, this was a challenge due to historical industry limitations, such as the high operating costs associated with legacy infrastructure. The cloud has removed the undifferentiated burden of infrastructure management, allowing investment managers to focus their human capital on innovation and new investment strategies while leveraging artificial intelligence and automation to optimize processes.
Finextra spoke with Brian Cassin, Head of Capital Markets, Amazon Web Services (AWS); Paul Fahey, Head of Investment Data Science, Northern Trust; and Kyle Reinhardt, vice president, client solutions for Venn, Two Sigma’s portfolio analytics platform, on how cloud-based technology is uprooting traditional IT operations, business models and strategies, and in turn, how cloud-based providers support these transformation journeys for financial institutions.
Are portfolio management companies becoming technology providers?
Cassin points out that investment managers are always exploring new ways to support their clients, and a new trend is to offer their internal data and services to their business partners or as an incentive to attract new clients. The cloud allows investment managers to experiment and innovate with these scenarios because if their strategy is working, they can easily scale to meet demand, and if not, they can shut down the project. without too many sunk costs.
Cassin adds that to keep pace with customer expectations, AWS customers are looking to accelerate their pace of innovation, leveraging data analytics and machine learning to drive new capabilities in areas like as client engagement, portfolio recommendations, digital assets, ESG scoring and new investment creation. assets, while automating middle and back office processes for monitoring, reconciliation and reporting.
Reinhardt adds that with the application of data science, portfolios can be better analyzed in less time. “Venn combines Two Sigma’s expertise in research and data science with easy-to-implement cloud-based technology to modernize the analytical experience for institutional investors. Our clients include asset owners, asset managers and advisors who collectively manage trillions of dollars in assets under management and use Venn to help perform factor-based risk analysis for manager due diligence , investment evaluation and portfolio optimization,” says Reinhardt.
Fahey, taking a slightly contrarian view, adds, “There are two things investment managers seek to do: generate alpha and distribute the proceeds. Everything else is outsourced. So while managers use technology to enable them to support their customers, they are not in the business to become technology providers.
“Where we see that manifesting itself is creating ecosystems where managers are doing what they are paid to do and what they want to focus on, but leveraging other providers in the industry, whether it’s Whether it’s AWS as a cloud provider or Venn by Two Sigma as a technology provider, it makes sense for their business and other vendors.
Therefore, financial institutions have a role to play. “At Northern Trust, we are able to not only help investment managers make sense of their data, but also leverage it in ways that improve client acquisition and engagement,” comments Fahey.
Traditional financial institutions have understood this need and are providing ever-richer tools that leverage their own investment experience as well as cloud-based technology, such as Two Sigma’s Venn and Northern Trust’s solutions as well as the Goldman Sachs Financial Cloud for Data on AWS, a suite of cloud-based data and analytics solutions for financial institutions that aims to reconfigure the way companies extract actionable insights and make investment decisions enlightened.
Risk modeling and scaling processor cores beyond an analog approach
Risk modeling for the investment management industry requires large-scale, on-demand computing power and the ability to scale thousands of processor cores, or processors, to analyze portfolio data and provide performance analytics. business risk to customers. Fahey states that “there are some things that are hard to do, like wading through large amounts of data without that ability to scale.”
However, Northern Trust offers an alternative to this problem of scale through its partnerships with fintech companies, which Fahey says help with “front office digitization, portfolio building, search management, up to execution. They effectively digitized the investment manager process that was historically analog – sitting in Excel spreadsheets, Word documents or emails. Trying to pull it all together was a challenge at the best of times.
“Now, as we see increased demand from investors for transparency into what companies are doing, managers themselves can deliver in near real-time, take some of their best ideas, recreate them and replicate them at scale. It’s a key differentiator,” says Fahey. Reinhardt, confirming that Venn and Northern Trust serve a similar clientele, agrees that much of the workload for portfolio managers, asset allocators and policymakers was, and in some cases still is, analog.
Reinhardt says Two Sigma “saw an opportunity to create a modern, easy-to-use, and highly scalable set of tools to quickly perform sophisticated analysis and better understand sources of risk and return across multiple asset classes.”
Cassin posits that some of the key questions an investment manager should ask are:
- How do we simplify the end user experience?
- How do we remove or streamline manual/analog processes?
- What’s the best way to plan and run large simulations and risk models cost-effectively and without conflict between teams?
- How can we improve collaboration and data accessibility for quants as well as business users?
Cassin and Fahey referenced a recent survey by Northern Trust and WBR Insights which found that a staggering 98% are already using, planning to pursue, or interested in integrating data science or data science tools. decision support in their investment process by the end of 2023.
This statistic is consistent with the organizations Cassin spoke to. “It’s 100% where they’re going. The more data they can extract – and there’s a treasure – the more decisions they can make to create a portfolio of 360 client views, whether it’s assessing ESG or simply doing quantitative research . Being able to tie different flavors of data together is an important way to think about how to build the next best ETF or the next best portfolio.
Agreeing, Fahey says, “We are going to see more disparate data sources and larger volumes of data in each of these datasets, all of which need to be analyzed. In addition to data volume and scale, accessibility between internal teams must be considered as mentioned earlier. The other part of that is that we’re seeing an expansion of that accessibility across all organizations, which technology is enabling. »
This expansion of accessibility is again increasingly possible through human capital optimization, as Reinhardt adds that today “you can drop a Venn link into your Microsoft Teams or your Slack feed with your colleagues. They can pick it up and see exactly what you’re working on and collaborate with you live on a web browser. Collaboration and accessibility of work has definitely been something that has really accelerated and changed the way individuals work together in the investment community.