Front-to-back solutions: myth or reality?
To paint a picture of the hedge fund space today is to show a world of tightening margins, an industry where fee-structures have shifted away from the historic 2 and 20 compensation structures and a business model restrained by regulatory changes. At the same time, as margins tighten, the modern investor continues to have a high expectation of operational and cost efficiencies, pushing fund managers to do more with less. Managers are adapting quickly and aspiring to create systematic efficiencies by lowering operational costs. Depending on the fund’s size, strategies may vary, but the desire for highly-flexible, scalable solutions, fed by reliable data, remains a constant.
“Managers want more standardised, integrated solutions and that standardisation trend is well underway,” says Ulf Svensson (pictured), head of strategy and business development for Bloomberg LP’s Enterprise Solutions group. “The ability to harness the power of an integrated platform, fed by high-quality data, is a powerful proposition when courting potential investors. After all, operational robustness is becoming just as important as the investment strategy itself when managers deliver their pitch.”
However, it’s not always advisable to take a binary approach to revamping legacy IT infrastructure. Instead it’s better to take a phased approach. Svensson notes, “At Bloomberg, we like to think of it as a journey. As clients’ demands change, we can provide cost-efficient and feasible solutions that help mitigate risk exposure.”
While funds have different levels of services depending on their maturity, there are some common building blocks that funds of every level need. Bloomberg offers a suite of hosted and managed services.
“In addition to Bloomberg’s popular desktop software, the Bloomberg Professional service, we have three cornerstones, or categories, of products and for hedge funds: market data, meaning reference and real-time data ,managed infrastructure services and applications for order management, trade execution, portfolio and risk management,” says Svensson.
Bloomberg occupies a unique position for the buy-side by virtue of its well-established presence; almost every investment management firm already uses Bloomberg information and has a commercial relationship with Bloomberg.
The use of Bloomberg’s desktop software in many institutional financial firms helps its credibility with hedge funds. Since 1982, Bloomberg LP has been a leading market data provider to the financial services industry. Bloomberg’s track record as a dependable source of comprehensive data is reinforced by the Bloomberg’s systems transparency and market-leading analytics. Reference and fundamental data is sourced back to the researcher or person responsible for collecting it. This system promotes accountability and transparency, which ultimately makes data dependable. The rigour Bloomberg puts into data quality is one of the reasons it is viewed as a leader in providing data accuracy, reliability, uniformity and speed. These same virtues now have the potential to transcend the entirety of the work flow as opposed to only the front-office suite.
Historically, hedge funds managers have familiarity with Bloomberg’s desktop system, analytics and execution tools. As a trader in the front-office becomes more aligned with the middle and back-office, the need for data consistency throughout the hedge fund organisation is driving demand for consolidated data streams.
Bloomberg has gained a great deal of credibility and added market share in the hedge fund space by building out its infrastructure. It has become a fully matured position portfolio management system, an evaluated pricing provider, a consistent and quality data distribution channel, and a fully integrated compliance engine, all offered through a managed infrastructure model, spanning asset classes. Bloomberg delivers information about more than six million instruments spanning asset classes that include equities, commodities, mortgage-backed securities, derivatives, mutual funds, real estate, foreign exchange, and more. When clients come to Bloomberg, they are now looking at a full, front-to-back solution. The overarching aim is to make data more available to users through this range of end –to-end solutions that aim to work in harmony to provide managers with the level of integration that best meets their individual needs.
“Bloomberg is far more than a provider of news and data,” says Svensson. “Having these different building blocks in place allows us to deliver a highly-flexible, scalable platform offering that ensures every component is working together, and accessing the same high-quality data.”
Emerging and established funds
For the established fund manager, efficiencies of scale require the ability to adapt pre-existing solutions with new demands. These funds must migrate from their legacy infrastructure to appeal to their existing and desired investor base.
“For such funds, the name of the game is to move away from the jigsaw puzzle infrastructure approach based on multiple systems and multiple data sets,” says Svensson. “Increasingly, fund managers and decision makers who were using alternative data feeds for their back and middle office teams are now looking for a solution that is fed by a consistent data set.”
Where established managers are concerned by the synthesis of legacy systems, emerging managers are pressured by the need to implement flexible front-to-back solutions that will satisfy operational needs during both the growth stage, as well as the move into established funds.
In response, Bloomberg offers flexible solutions that can attract funds at every stage and integration phase.
For instance, Bloomberg’s Asset and Investment Manager (AIM) supports many business functions through the entire value chain, it is most established as a portfolio manager and order management system for the buy-side.
For the emerging fund manager that oversees a fund of USD250 million assets under management (AuM) or less, Bloomberg offers the ‘hedge fund in a box’ technology solution known as HBOX. HBOX is a turnkey solution that combines sophisticated business management tools such as an order management, profit and loss calculations, execution management, compliance and straight through processing (STP) all integrated with Bloomberg data. As a fund grows, the HBOX solution enables fund managers to transition to using the full AIM offering. Bloomberg understands the upfront operational risk that emerging funds hesitate to take on, and has responded by developing scalable solutions which accommodate the need for flexibility.
Equally, for established funds, implementing a Bloomberg solution does not necessitate migrating away from their existing infrastructure. Many managers have invested in a proprietary solution or bought technology solutions off the shelf. Bloomberg has established relationships with more than 100 third-party technology providers to facilitate system and data integration on behalf of a client. This ensures that managers do not have to replace existing systems. Using consistent data from the desktop to financial models, trading systems, compliance and reporting applications enhances portfolio management and improves risk and compliance practices.
The overarching objective is to make data more available to users. Bloomberg data nourishes Bloomberg’s systems as well as proprietary and pre-existing systems, spanning across all asset classes. Bloomberg’s goal is to provide managers with the level of integration that best meets their individual needs. Bloomberg understands that in today’s heightened regulator environment where there is increased investor scrutiny of hedge fund investments, fund managers are being prompted to review the underlying assets in a firm’s investment portfolio. That, in turn, multiplies the amount of information that needs to be shared and processed before confident decisions can be made.
For example, Bloomberg’s evaluated pricing service, also known as BVAL, combines unique market insight and quantitative models with data from thousands of contributing sources to produce credible, transparent and defensible valuations for OTC securities and derivatives. Bloomberg data undergoes a rigorous verification process so hedge funds can evaluate pricing for traditional assets and derivatives, as well as enhance compliance reporting and risk analytics
Bloomberg value proposal
Svensson adds, “Hedge funds are different from other buy-side groups because they have, depending on their strategy, a bit more flexibility. This creates the need for flexible infrastructure and system support. At Bloomberg, we are pleased that the market no longer sees us as a desktop-only vendor, but rather a partner for evaluation, compliance and infrastructure support. We will continue to evolve with the trends and demands of the markets and we continue to value the trust our clients place in us to deliver innovative and scalable solutions that meet their needs.”
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