Thinking

A Singular Approach to Multi-Asset Management

September 01, 2015 Clare Witts
Technology is constantly evolving to meet the demands of increasingly sophisticated asset managers and growing regulatory scrutiny.

When it comes to multi-asset investing and the trading tools that go along with it, hedge funds are at the front of this curve and are looking increasingly ‘institutional’ in their use of technology to deal with the wide variety of asset classes they invest in. This is particularly important in today’s markets where the Asian hedge fund industry is growing at a rapid rate, and strategy diversification is an important part of generating alpha and attracting investment.*

At the same time, the global regulatory landscape is demanding higher levels of transparency and risk management than ever before. In Hong Kong, the SFC’s electronic trading regulations place risk and systems adequacy requirements directly on to hedge funds and asset managers across their use of electronic trading platforms. Singapore, Hong Kong and Australian regulators all have current consultations out regarding the reporting and management of OTC derivatives. There is a global focus on FX trading and a push to drive transparency in that market following high profile scandals. Furthermore, from a purely commercial perspective, reducing risk and minimising work by having operational and trading systems working seamlessly across asset classes is a top priority for many hedge fund COOs.

LEARNING FROM EQUITIES, BUILDING FOR MULTI-ASSET

In many respects, lessons can be learnt from the evolution of the equity markets and the technology tools that have developed. Trends from equities now flowing through to other asset classes include the increased focus on transaction costs, counterparty risk management and transparent business processes. This can be seen in the development of products such as TCA for FX, block crossing systems for fixed income, or automated quoting tools for complex OTC products.

Bringing a singular, standardized approach to multi-asset operational management is essential for hedge funds who are looking across products for investment returns. When it comes to selecting trading platforms, the integration of these analytics, execution and quoting tools into both the equities and the multi-asset model has now become an essential part of doing business. However given how different the various asset class workflow requirements are from the more traditional equity-only model, multi-asset platforms must be chosen carefully.

FINDING CONSISTENCY IN A MULTI-ASSET WORLD

A key criteria is that systems need to be integrated from front to back with a straight through process. This reduces both operational risk for the business, and the workload of those who use the systems day to day. The systems must link together, from the Execution Management System (EMS) which sends orders out to broker desks and algorithms, on to the order management system (OMS) that sets allocations and compliance rules, through to the position management system (PMS) that displays real time profit and risk while interfacing with prime brokers, custodians and fund administrators. Integrated systems ensure that data formats are consistent across asset classes and tools and are drawn from the same source, reducing the risk of errors in ‘translation’ between areas of the business, and costly duplication of data sources.

Choosing integrated tools can also have a significant effect on both the initial and future cost of multi-asset platforms – buying separate components from different vendors and then needing to manage and pay for interfacing and development work to connect them all typically results in a far higher set up cost and slower implementation. However, it is also important to choose platforms that deliver not only on the requirements of the fund today, but also for future growth. Many platforms are priced according to number of users, asset class modules, or by AUM of the fund, with additional charges added at every level of expansion. An EMS/OMS/PMS platform that may have an upfront cost of USD $50,000 per annum can end up costing many multiples of that after all the integrations are done with different counterparties, or after two years as the fund grows or adds strategies. Scalability across asset classes and size should be part of the decision making process for a hedge fund whenever they are reviewing their platforms, and understanding how costs will change with growth or diversification into different asset classes can save both money and time down the track.

USING TECHNOLOGY TO GET, AND STAY, IN THE GAME

The rate of multi-asset technology development is benefiting hedge fund managers in a number of ways. Particularly in Asia where hedge fund start ups are typically smaller than those in the US or Europe, new, accessible multi-asset platforms are enabling them to compete with larger firms at an operational level from day one. This frees up portfolio managers and traders to focus on their day jobs of alpha generation; it allows their investment strategies to evolve over time without being limited by operational and systems constraints; and it positions them well when it comes to reporting to existing clients and fund raising with new investors. This last point is particularly important in the context of global investment and fund raising. In order to attract investment from institutional asset owners, hedge funds need to demonstrate ‘institutional grade’ systems and processes. Whether this relates to best execution, risk management or portfolio valuation and reporting, technology platforms that can help to automate these processes become essential.

When it comes to choosing a platform, there is little future for a non multi-asset system. It’s already possible to automate not just OMS/ PMS and EMS functions, but also embed functionality such as the ability to get STP request for quotes on complex OTC products, or stream FX. Around this there is a requirement for accurate analytics, access to different execution venues and streamlined reporting tools.

In many ways hedge funds are leading this integration of multi-asset tools as they drive their investment models forward. Choosing platforms that grow with them is an essential part of both their business and investment strategy, now and for the future.

*Total hedge fund AUM in Hong Kong increased by 39% between 2012 and 2014. Equity long/short and multi-strategy remained the most popular investment strategies. Source: SFC Report of Hedge Fund Activities, March 2015.

This article was originally published in Global Trading Magazine

  • Clare Witts

    Head of Relationship Management, Asia Pacific

    Clare Witts is responsible for the strategy and implementation of ITG’s interaction with institutional clients, regulators, exchanges and the media across the Asia Pacific region.

    She also runs ITG’s Commission Management and CSA program in Asia and Australia.