How is Alternative Data Giving Investment Managers the Edge?

Posted on : 29-03-2018 | By : richard.gale | In : Consumer behaviour, Data, data security, Finance, FinTech, Innovation

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Alternative data (or ‘Alt-Data’) refers to data that is derived from a non-traditional source covering a whole array of platforms such as social media, newsfeeds, satellite tracking and web traffic.  There is vast amount of data in cyber space which, until recently remained untouched.  Here we shall look at the role of these unstructured data sets.

Information is the key to the success of any investment manager and information that can give the investor the edge is by no means a new phenomenon.  Traditional financial data, such as stock price history and fundamentals has been the standard for determining the health of a stock. However, alternative data has the potential to reveal insights about a stock’s health before traditional financial data. This has major implications for investors.

If information is power, then unique information sourced from places not-yet-sourced is giving those players the edge in a highly competitive market. Given that we’re in what we like to call a data revolution, where nearly every move we make can be digitized, tracked, and analysed, every company is now a data company. Everyone is both producing and consuming immense amounts of data in the race to make more money. People are well connected on social media platforms and information is available to them is many different forms. Add geographical data into the mix and that’s a lot of data about whose doing what and why. Take Twitter, it is a great tool for showing what’s happening in the world and what is being talked about. Being able to capture sentiment as well as data is a major advance in the world of data analytics.

Advanced analytical procedures can pull all this data together using machine learning and cognitive computing. Using this technology, we can take the unstructured data and transform it into useable data sets at rapid speed.

Hedge funds have been the early adopters and investment managers have now seen the light are expected to spend $7bn by 2020 on alternative data.  All asset managers realise that this data can produce valuable insight and give them the edge in a highly competitive market place.

However, it could be said that if all investment managers research data in this way, then that will put them all on the same footing and the competitive advantage is lost. Commentators have suggested that given the data pool is so vast and the combinations and permutations analysis is of data complex, it is still highly likely that this data can be uncovered that has not been uncovered by someone else. It all depends on the data scientist and where they decide to look. Far from creating a level playing field, where more readily available information simply leads to greater market efficiency, the impact of the information revolution is the opposite. It is creating hard-to access pockets for long-term alpha generation for those players with the scale and resources to take advantage of it.

Which leads us to our next point. A huge amount of money and resource is required to research this data, and this will mean only the strong survive. A report last year by S&P found that 80% of asset managers plan to increase their investments in big data over the next 12 months. Only 6% of asset managers argue that it is not important. Where does this leave the 6%?

Leading hedge fund bosses have warned fund managers they will not survive if they ignore the explosion of big data that is changing the way investors beat the markets. They are

Investing a lot of time and money to develop machine learning in areas of its business where humans can no longer keep up.

There is however one crucial issue which all investors should be aware of and that is the area of privacy. Do you know where that data originates from? Did that vendor have the right to sell the information in the first place?  We have seen this illustrated over the last few weeks with the Facebook “data breach” where Facebook sold on some of its users’ data to Cambridge Analytica without the users’ knowledge. This has wiped $100bn off the Facebook value so we can see the negative impact of using data without the owner’s permission.

The key question in the use of alternative data ultimately is, does it add value? Perhaps too early to tell. Watch this space!

The tech company threat to financial services

Posted on : 31-08-2017 | By : john.vincent | In : Finance, FinTech, Innovation

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We were interested to read the update from the World Economic Forum in their August 2017 publication “Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services”. The report forms the third phase of work, started in 2014, into understanding the potential impacts of transformative new entrants to financial services, which fintech innovations were most relevant, the implications on consumers, existing providers, regulatory impacts and the infrastructure underpinning the future of financial services (such as blockchain).

Specifically, it considers;

  1. What are the innovations that have had the greatest impact since the report was commissioned?
  2. How have they changed the structure of financial services and how they are consumed? and;
  3. What are the broader implications for the sector?

At this point, it is important to note the contributors to the WEF report consist of a steering group and working group of senior leaders from mainly banks, insurers and payment providers, with some VC’s (largely at the working group level). That isn’t to detract at all from the findings, but is an important lens from which to consider the viewpoint (indeed, there are some points where the contributors are also presented as solutions to industry trend, such as “externalisation”).

So what are the conclusions? In a nutshell. whilst fintechs have so far failed to disrupt the status quo, they have “laid the foundation for future disruption”. In other words, we are still at the start of the beginning. No surprise really, given that whilst the barriers to entry in technology innovation have dramatically lowered, the implementation of there within the highly regulated, complex ecosystem of financial services has proved more challenging. Indeed, whilst changing the shape and approach to innovation has been a success, as well as raising the consumer expectation bar, the actual material changes have been largely periphery or improvements to existing infrastructures.

Whilst it is recognised that the incumbent players have responded to the pace of the fintech ecosystem, both by embracing startups and ideas, we don’t believe that this is as optimal as it could be. The report highlights that some firms have waited to see how new technology gain traction “before deploying their own solutions” is symptomatic of the issue. There is still an arms-length, protectionist attitude which pervades and is ultimately detrimental to the long-term business model of many financial institutions.

Of course, this is only human nature, and one might argue even more so in this particular sector.

The report cites 8 disruptive forces which have the potential to shift the landscape and competition in the coming years. Many of these are no surprise, from the power transferring to the customer interface (experience ownership) through to the reliance of financial institutions on large technology firms. The latter is something that we have written about a lot about over recent years, and we strongly believe that by accelerating technology partnerships and shifting delivery outside of the organisational boundaries, it would really benefit many financial services firms. Somebody will take the plunge and steal a march on the market…surely.

The report delves into the implications for different sectors (Insurance, Digital Banking, Lending, Crowdfunding etc.), what the end states might be and conclusions, such as in Investment Management the robo-advisors which are commoditsing the advisory value proposition whilst humans will still maintain a crucial role in products selection, particularly for high net worth individuals.

Let’s pick on Digital Banking though, just focus on a little. In this space the report highlights the importance of capabilities in customer-facing analytics and intelligence that are increasingly important from a competitive differential. Who are best at this, have a richness and, more importantly, a golden source, of data? The big four? The major insurance companies? Unlikely and, more importantly, the systems, people and processes are not going to change that in the short to medium term.

Given the conditions above, we are likely to see the usual technology companies that do excel in this space such as Google, Amazon, Facebook and the like (maybe Uber) chose to enter the market distribution of financial services products in the short term (see our prediction from 2011!). Whilst financial services firms establish technology partnerships with some of these tech firms, it is not a huge leap of thinking to have them pivot to providing competitive services very quickly. They have the data, the customer engagement, the brand, the scale and the capital to do this, plus the ecosystem of partners to plug any gaps.

Ah, but what about the regulators! From their perspective, we expect a softening of stance towards the distribution of products by tech firms, whilst having a close eye on the potential market dominance and systematic risk profile. In terms of the entrants, we already see technology easing the burden of regulation in the coming years, rather than employing an army of human beings, and the tech firms are again in the driving seat to benefit from this.

Maybe we are closer to “FaceBank” than ever.

 

 

Investment Management – what’s left to outsource

Posted on : 30-11-2016 | By : richard.gale | In : Finance

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Many Investment Management (IM) firms have outsourced significant business functions: settlement, collateral management, accounting departments have been ‘lifted out’ of a significant number of IM companies and are being run as a service by a smaller number of specialised financial services organisations.

We think the next phase for outsourcing are the middle and some of the front office functions as focus for IM firms is on ability to out-perform, reduce time to market for new products and to reduce costs. Regulation is a key driver for this as the complexities of dealing with constant regulatory change is increasing costs and constraints on  IM firms ability to move into new, more profitable, markets. New investment themes such as liability driven investing and securities such as OTC derivatives are much more widely utilised in investment firms than, say, 5 years ago. There is also the avalanche of regulation in-flight (AIFM, Dodd-Frank, MiFIR & Solvency II to name a few)  to enforce reporting and risk management. This results in operational activities such as collateral management becoming much more complex than transacting with conventional securities.

A few months back we discussed the future of middle office outsourcing with Maha Khan Phillips in Best Execution magazine and we want to expand on those thoughts here.

Another trend we see is how the Investment Banking industry is starting to look at outsourcing the non-value-add functions to reduce costs and help streamline their business areas. They are being impacted in a similar way to IM firms at the turn of the century in terms of reduction in income and focus on cost reduction.

 Outsourcing history and developments

The first phase of outsourcing often was a simple ‘lift-out’ where the back office was separated as a whole – people, systems, and processes  with a line drawn across the organisation splitting the remaining front/middle office from the outsourced back office. This was driven by a number of factors but cost reduction and the drive to better returns was core.

As an approach the lift-out worked and enabled the IM organisation to focus on its core business of investing money.  Over time as the industry matures, the limitations of this approach are becoming clear. The ability to be responsive to new business requirements can be reduced:  flexibility in the operating model to react to new changes such as business focus, new asset classes and volume variations are often slowed by split between organisations. The outsourcers will have a number of clients with differing requirements and a limited ability to change which can impact speed of delivery.

These factors have led to some operational challenges and frictions between the client and supplier the result of which has led to a reassessment of the services and relationship. The client has a number of choices available and, as the earlier contracts mature, firms are identifying this period as an opportunity to review the current state vs. alternative strategies. The choices are broadly:

  1. Insource. To undo the lift-out and bring services back in-house. Some organisations have done this with varying degrees of success but the underlying rationale for outsourcing and the business case underpinning this needs to be closely examined.
  2. Migrate to new outsourcer. This is potentially one of the more complex solutions but also a possibility to re-engineer the business. Often there are complex interactions between the client/supplier that exist because of the way the outsource was constructed historically. This ‘web’ of interfaces, processes and procedures will need to be cleaned and logically split to migrate. Also the level of complexity from moving from one (client) organisation to an outsource supplier goes to a new level when migrating suppliers.
  3. Stay with existing and work together to improve service, relationship and capabilities.
  4. A combination of the above not excluding outsourcing more functions of the client firm.

Assuming the client strategically does not which to insource the functions then one of the most important activities is to grow the client/supplier relationship into an aligned partnership. This is the time when parties need to work together to construct a roadmap to move to a more efficient, cost effective and flexible model to deliver optimised services and capacity to grow.

This trend is gathering pace as firms look to ‘smarter’ outsourcing which bundles up groups of functions and let someone else look after the day to day management whilst enjoying a consistent service and pricing. Significant middle office functions are in-scope and included in those are what are traditionally seen as front office capabilities such as deal execution and compliance monitoring.

Interestingly the Buy-side has led the way on outsourcing. Investment banks have previously been too busy ‘running’ to keep up – growing new business areas and have been wary of outsourcing as a brake on their flexibility and ability to expand. The focus has been on IT infrastructure, testing & development and creating ‘captives’ in lower cost areas for operations. Now cost and regulatory pressures are proving a heavy burden then banks are now spending more time and energy looking into outsourcing their non-propriety functions. We think this is one of the trend areas for the next few years.

This is an updated version of our article first published in 2012. The thoughts are still very relevant and we wanted share them again.

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Investment Management in the Cloud – Is it Time to Move?

Posted on : 29-01-2016 | By : Jack.Rawden | In : Cloud, Finance

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One of Broadgate’s key predictions for 2016 is the continued acceleration of cloud technologies within organisations. Finance, often the trailblazers for new technologies, have been slow to adapt to this technology for a variety of reasons (discussed later). As the technology matures, the arguments to not move toward the cloud become less and less. In this article we will discuss a few of the major reasons, based off discussions with our clients, as to why there has been slow cloud adoption in investment management.

Security is at the forefront of a CIO looking to move to the cloud. The perceived loss of control and ownership of data plus concerns about how a service provider might secure your data can be a worry.  There is also the risk of interception of data whilst it is being transferred. The counter argument of this is simple. Often we find SaaS firms have a bigger budgets associated to cyber security – plus as specialist providers and holders of multiple organisations data they have a greater exposure if a breach were to occur. If they were to lose your data, would you renew your contract with them? Probably not.

Due to this the level of security is often dramatically improved from that of a traditional financial institution and providers often have:-

  • An infrastructure that is designed to be more secure with additional safeguards in place
  • Greater levels of encryption
  • More resources dedicated to keeping data secure
  • Updated latest principles and best practices
  • More technology to detect threats and breaches

 

Moving data to a site other than your own can cause not only security concerns but also about conformity to regulation and ownership.  New EU data ownership rules, due to come in force in 2017 (see this useful article on them from computer weekly http://www.computerworlduk.com/security/10-things-you-need-know-about-new-eu-data-protection-regulation-3610851/) mean financial regulators might investigate how and where sensitive data, particularly client data is being stored.  International/Multi-national providers are overcoming this by opening targeted data centres – for example EU only or UK only depending on the classification of data. Amazon Web Services, Microsoft Azure Cloud and major financial providers such as BlackRock all have these offerings. These comply with all major and new regulations. Usefully, if an organisation is split between countries, it is possible to implement local data centres and ownership, e.g. having a Swiss Data Centre and UK Data Centre for the same functionality.

Another key concern mentioned when moving to the cloud are potential performance issues. What happens if the cloud “goes down” or connectivity is lost? What happens if there are latency issues between the cloud and local machine?

Connectivity/Uptime of servers, in our experience, is still an important factor when agreeing contracts and service levels.  However, SaaS providers rarely fail to hit these levels and if issues occur  then there are economies of scale for large providers through having live backups, better failsafe’s and more resources to bring systems back online.  With that we often find there is an improved recovery plan and business continuity plan that a typical investment manager.

Latency levels can often be more difficult to overcome and may require changes to infrastructure.  Dedicated connections now widely supported by cloud providers mean that speeds are fast and often users are unaware that solutions are hosted off site.

With the above considerations there has often been trepidation with moving operations, particularly critical operations such as trading, into a cloud environment. Organisations are often looking for a competitor to make a move to see how they fare, or potentially sticking with the more traditional methods and applying the logic “If it aint broke, don’t fix it”.  This has been compounded by the fact the traditional investment management products have also been slow to adapt their offerings, sticking with the current on premise solutions, rather than offering updated SaaS based solutions.  However, products such as Blackrock Aladdin offering a standardised full functionality cloud based hosted platform are trailblazing this area.

So after overcoming the potential issues that might be faced with the cloud, why would a firm want to move it’s offering to the cloud, this will be the focus of a future article but the major factors are:-

  • Increased Agility
  • Reduced software/hardware maintenance
  • Ability for investment managers to focus on investments over technology
  • Reduces the time to market for new products

With advantages of the cloud becoming recognised we are finding that this is an area where vendors and investment managers are really focussing.  Traditional vendors are adapting their products to be able to provide cloud based services and are producing some excellent new products. Investment managers see the potential service improvements, cost savings and maintenance savings discussed above. It’s an area that is rapidly changing and adapting on a monthly basis.  It’s where we will be watching for new technology improvements in 2016.

Investment Management – what’s left to outsource.

Posted on : 30-09-2014 | By : richard.gale | In : Finance

Tags: , , , , , ,

0

Many Investment Management (IM) firms have outsourced significant business functions: settlement, collateral management, accounting departments have been ‘lifted out’ of a significant number of IM companies and are being run as a service by a smaller number of specialised financial services organisations.

We think the next phase for outsourcing are the middle and some of the front office functions as focus for IM firms is on ability to out-perform, reduce time to market for new products and to reduce costs. Regulation is a key driver for this as the complexities of dealing with constant regulatory change is increasing costs and constraints on  IM firms ability to move into new, more profitable, markets. New investment themes such as liability driven investing and securities such as OTC derivatives are much more widely utilised in investment firms than, say, 5 years ago. There is also the avalanche of regulation in-flight (AIFM, Dodd-Frank, MiFIR & Solvency II to name a few)  to enforce reporting and risk management. This results in operational activities such as collateral management becoming much more complex than transacting with conventional securities.

A few months back we discussed the future of middle office outsourcing with Maha Khan Phillips in Best Execution magazine and we want to expand on those thoughts here.

Another trend we see is how the Investment Banking industry is starting to look at outsourcing the non-value-add functions to reduce costs and help streamline their business areas. They are being impacted in a similar way to IM firms at the turn of the century in terms of reduction in income and focus on cost reduction.

 Outsourcing history and developments

The first phase of outsourcing often was a simple ‘lift-out’ where the back office was separated as a whole – people, systems, and processes  with a line drawn across the organisation splitting the remaining front/middle office from the outsourced back office. This was driven by a number of factors but cost reduction and the drive to better returns was core.

As an approach the lift-out worked and enabled the IM organisation to focus on its core business of investing money.  Over time as the industry matures, the limitations of this approach are becoming clear. The ability to be responsive to new business requirements can be reduced:  flexibility in the operating model to react to new changes such as business focus, new asset classes and volume variations are often slowed by split between organisations. The outsourcers will have a number of clients with differing requirements and a limited ability to change which can impact speed of delivery.

These factors have led to some operational challenges and frictions between the client and supplier the result of which has led to a reassessment of the services and relationship. The client has a number of choices available and, as the earlier contracts mature, firms are identifying this period as an opportunity to review the current state vs. alternative strategies. The choices are broadly:

  1. Insource. To undo the lift-out and bring services back in-house. Some organisations have done this with varying degrees of success but the underlying rationale for outsourcing and the business case underpinning this needs to be closely examined.
  2. Migrate to new outsourcer. This is potentially one of the more complex solutions but also a possibility to re-engineer the business. Often there are complex interactions between the client/supplier that exist because of the way the outsource was constructed historically. This ‘web’ of interfaces, processes and procedures will need to be cleaned and logically split to migrate. Also the level of complexity from moving from one (client) organisation to an outsource supplier goes to a new level when migrating suppliers.
  3. Stay with existing and work together to improve service, relationship and capabilities.
  4. A combination of the above not excluding outsourcing more functions of the client firm.

Assuming the client strategically does not which to insource the functions then one of the most important activities is to grow the client/supplier relationship into an aligned partnership. This is the time when parties need to work together to construct a roadmap to move to a more efficient, cost effective and flexible model to deliver optimised services and capacity to grow.

This trend is gathering pace as firms look to ‘smarter’ outsourcing which bundles up groups of functions and let someone else look after the day to day management whilst enjoying a consistent service and pricing. Significant middle office functions are in-scope and included in those are what are traditionally seen as front office capabilities such as deal execution and compliance monitoring.

Interestingly the Buy-side has led the way on outsourcing. Investment banks have previously been too busy ‘running’ to keep up – growing new business areas and have been wary of outsourcing as a brake on their flexibility and ability to expand. The focus has been on IT infrastructure, testing & development and creating ‘captives’ in lower cost areas for operations. Now cost and regulatory pressures are proving a heavy burden then banks are now spending more time and energy looking into outsourcing their non-propriety functions. We think this is one of the trend areas for the next few years.

This is an updated version of our article first published in 2012. The thoughts are still very relevant and we wanted share them again.

www.twitter.com/broadgateview