Taming the big data bronco
Asset management firms often contain
internal silos, with portfolio managers and trading desks using their own
separate data to make decisions. That needs to change, according to Marshall
Saffer, COO at technology and business consultancy firm MIK Fund Solutions.
Earlier this year, MIK Fund Solutions
carried out research into the way US hedge funds use data. For Saffer, one of
the key insights was that many of the internal systems at these firms, from
accounting to risk systems and even trading desk tools such as algorithms, were
not connected to each other. In addition, these systems were often overly
focused on individual transactions, making it difficult to work out how they
related to the company’s overall objective – generating alpha for clients.
“Most firms do not have an integrated data
layer that brings together all of the input from their various systems and
translates it into something that PMs, CFOs and COO can relate to the bigger
picture,” he says. “They get by, but they’re relying on individuals rather than
an efficient system to manage their data and inform their decisions.”
Command of information has always provided
an advantage to portfolio managers that could use quant-driven insights to
develop their investment strategies. But MIK Fund Solutions’ research suggests
that much information currently available is underused. The firm’s most recent
paper, ‘Using Every Bit to Byte: Leveraging Data to Generate Alpha’, found that
many fund managers never use the data resident in the firm to inform their
strategy or investment decisions. The research concluded that the main problem
was that there is often no mechanism for reconciling internal databases with
external sources of information.
“Communication between portfolio managers
and trading desks needs to improve,” says Saffer. “Internal data on risk,
accounting and historical performance should all become a part of portfolio
manager decision making. Both parties need to bring their data together and use
it to generate alpha.”
Investment institutions have had to deal
with increasing quantities of information in recent years, as reduced average
trade sizes, market fragmentation and the rise of high-frequency trading have
all contributed to push up market volumes and especially message traffic far
above levels seen five years ago.
As the need to process more and more data
has increased, buy-side firms have been forced to expend more resources on
their technology systems. Saffer is concerned that this has led to a “cost-focused”
mentality, in which asset management firms view data as a drain on their
resources, rather than an opportunity to generate returns.
“Data should not be viewed as a cost,” he
says. “It is there to help you generate alpha. Building up that infrastructure
is investing in your future. It is a powerful tool that should not be
Already, systems are being developed that
can help institutional investors reconcile their data and processes to produce
more efficient decisions. MIK Fund Solutions offers a data warehouse service
that consolidates portfolio-related data in a single location, as well as a
real-time portfolio monitor designed to help PMs keep track of their exposure.
Meanwhile earlier this month, trading software and services provider INDATA
launched a product called iPM Connect, which allows users to integrate their
research management tools, together with portfolio management, reporting and
customer relationship management.
Saffer believes that building a more
connected, more collaborative business model that draws on all the information
available to the collective parts of a firm could be the key to success in a
competitive trading environment. Firms that embrace ‘big data’, drawing it
together to inform trading decisions, will be able to outperform their rivals
and generate returns far faster than those that continue to allow siloes to
exist within their ranks.
“The more information available and the
closer that information is to decision making in real time, the better the
decision,” says Saffer. “Portfolio managers exist to add value through their
investment strategies. Every information advantage could make the difference
between success and failure.”