As the institutional investment management business gets more expansive, complex and competitive, the technology underlying its processes needs to evolve with it.
Cost pressures weighing on buy-side firms stem from their having to comply with an increasing global regulatory landscape and the secular shift to passive investing which has reduced their fees. In response, asset managers seek to grow revenues by expanding their footprint globally or starting to offer new products — which necessitates a checkup, and possibly an overhaul, of their existing technology suite.
“Many firms are extending their offerings — going into multi-asset strategies, incorporating derivatives, bolstering their FX and options capabilities, etc.” said Michel Finzi, Head of Product at Enfusion, a provider of cloud-based investment management software. “As they embark on this journey, many of them have to evaluate whether their existing technology suite, usually a combination of disparate systems each performing distinct functions, can get them to where they want to go. Often the answer is no.”
A distinction is often made between traditional ‘long-only’ institutional investment managers, which are generally perceived as conservative and not the fastest to embrace new technology, and hedge funds, which are smaller, nimbler and more cutting-edge. Finzi said the tech gap is at least partly attributable to traditional firms being saddled with legacy tech, while newer hedge funds can build from the ground up.
Traditional buy-side firms “usually have a technology stack that they claim is five to seven years old, but in reality it’s probably older than that,” Finzi said. “They’ll typically have a combination of vendor and in-house systems which have been highly customized for their particular deployment, and which interact and integrate with other proprietary systems. With this setup, adding new functionality, support for new asset classes or expanding into new markets tends to be a very long and painful re-implementation process.”
That’s where agility, flexibility and nimbleness — buzzwords often used to describe newer cloud-based technology — come in. “With the multi-tenant Software-as-a-Service model, a firm can immediately have updates as soon as they are available. Their technology platform can basically grow as they grow, by delivering the latest and greatest innovations immediately without the need for a painful implementation or integration,” Finzi said. “Without this technology delivery model, firms can be stuck in terms of how nimbly they can expand into new asset classes, expand into new regions or offer new products.”
BlackRock, which manages $7.43 trillion and is a standard-bearer in the investment management industry, gave a vote of confidence in cloud technology when it put its Aladdin infrastructure on the Microsoft Azure cloud platform in April 2020. “Among the many benefits, we are most excited about the opportunity it will provide to increase the pace of innovation for clients, increase geographic flexibility to meet local needs, and the additional scale and resiliency,” BlackRock said.
Based on what cloud is good at vis-à-vis with what asset managers’ needs are, cloud adoption can be expected to ramp up. According to a 2020 Northern Trust survey, 85% of asset managers cited supporting expansion into new markets as a strategic priority in the next two years, while 69% cited supporting new asset classes and 50% cited expanding the product set. With regard to how to achieve the priorities, 64% of survey respondents said they plan to leverage new technology.
Enfusion’s Finzi said specific benefits of adopting cloud technology include greater operational efficiency and scalability, lower total cost of ownership, and a reduced need for inter-system reconciliation.
“It’s always more expensive to use multiple systems to do the totality of what you need to accomplish,” he said. “Investment firms now have the opportunity to engage with single-source providers who can provide the entire front to back investment management and operations lifecycle , where a standard set of data and information powers all aspects of the business in real-time, from portfolio management to trading to trade life-cycle management to analytics and reporting. You can achieve tremendous efficiencies by having everything powered by the same source of underlying data and being able to access it from any device reliably, wherever you are working from.”