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Software brings new focus to research

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One powerful lesson of the global market turmoil of the past 18 months is that hedge fund managers and other investment firms need to have better control of the voluminous research data that underlies their due diligence efforts and investment decisions.

Investment firms have long benefited from technology that supports such functions as portfolio accounting, performance measurement, income management, settlement, risk, investor relations and trading. Until recently, however, there was no workflow assistance for the core functions of researching and selecting investments.

This absence had become more glaring because of changes in the research process over the past decade, with investment banks scaling back the production of research for the buy-side. Managers today conduct a larger proportion of primary research in-house and draw from a disparate array of sources in making investment decisions. The research data that firms generate and receive resides in a wide variety of systems and in diverse formats – notes saved on an individual’s PC or in a notebook on a shelf, e-mail content, web links and contact management systems.

While asset managers may have a much broader range of data and analysis on which to base their decisions, they face a major challenge in trying to collate and organise the diverse components of the research process. At the same time, senior management needs the ability to see a global picture of the research being carried out throughout the organisation.

This also applies to fund of hedge funds managers in the wake of the losses resulting from the alleged Bernard Madoff fraud. Facing greater regulatory scrutiny, fund of funds firms now recognise the need to carry out due diligence more effectively, as well as to make their findings more readily accessible and their decisions clearly supportable.

The trend toward increased diversity of research materials and the critical importance of due diligence are driving firms to seek the same efficiency gains in investment decision-making that they have experienced in trading operations and back-office functions. In the current environment, systems that might have been seen as desirable a couple of years ago have now become vital. Saving an analyst even 30 minutes during a busy earnings period by eliminating the need to search through several databases for key information can be invaluable.

Until recently, organisations that recognised the importance of bringing information technology to bear upon their research efforts believed they had to develop their own in-house systems. Now, however, research management solutions (RMS) from independent developers, which enable firms to centralise and integrate research information from multiple sources, have begun to capture the interest of the industry.

Among its many advantages, an effective RMS resolves the nagging issue of research data being scattered among multiple, disparate systems. It provides a centralised electronic framework for saving, organising and searching all of a firm’s research materials, in ways that suit its investment process.

This allows users to concentrate on their primary tasks of analysis and decision-making rather than wasting time searching for material already in their possession. And as well as assisting the work of individual researchers and portfolio managers, they facilitate the sharing of information by multiple teams or offices and provide a structure that eases executive oversight of research activities.

Hedge fund managers have been the early adopters of RMS, whether in large, institutional-style groups or in smaller firms with just a handful of investment professionals. Portfolio managers in smaller firms often conduct much of their own research, and automated organisation and centralisation of research materials can help free up scarce human resources.

Meanwhile, demand is growing among traditional asset managers, particularly after the turmoil in the markets over the past few months that has heightened the focus on due diligence and transparency in decision-making. Not only are firms benefiting from research teams being able to manage their work more efficiently, but senior executives are insisting on the ability to access research in real time as information is discovered. As well as gaining direct access to researchers’ output, senior managers are anxious to ensure that their intellectual capital does not disappear when employees leave the firm.

Regulators, too, are recognising the value of systems that organise the research that underlies a firm’s investments. A number of larger firms are already using RMS to respond to investor queries and to meet regulatory requests for audit trails on investment decisions. With root-and-branch review of investment regulation underway in many jurisdictions, this is likely to become more important in the future. And in the worst-case scenario, documentary evidence of thorough due diligence in the decision-making process may be crucial to asset managers defending lawsuits from disgruntled investors.

The first RMS was developed by Tamale Software and launched in late 2004. Advent Software’s acquisition of Tamale, completed in the autumn of 2008, now gives the product the momentum offered by Advent’s global reach in the asset management industry. Today, Advent Tamale RMS has emerged as a leader in the research management field, providing a robust and efficient alternative to the often lengthy and costly process of in-house development. Its arrival on the world stage is timely, as firms are becoming aware that failings in the way they have traditionally handled research materials can lead to costly investment mistakes.

Advent Tamale RMS has been designed to provide a user-friendly mechanism to transfer files created in standard applications such as Microsoft Office, including meeting notes, contact information, spreadsheet models, investment analysis, proprietary and broker research, calendar entries and web-based news. With plug-ins for the applications they use most frequently, investment professionals can save documents to a shared research repository with a single click.

The system then indexes all material automatically and makes it searchable for the system’s users. Tight integration with everyday software tools makes the system easy to implement and use for researchers and portfolio managers. One fund of funds client recently did a search for Madoff across their entire research database and instantly discovered 41 funds with some form of affiliation, but were quickly able to determine that they had no exposure. This invaluable information would previously have taken days or weeks to consolidate.

The ease-of-use focus extends to remote access facilities, including an e-mail adapter that allows users working outside the office to send materials such as company visit notes directly into the system. Users can also download the database onto a laptop to work offline, and their data will synchronise automatically the next time the computer connects to the company’s network.

Integration also extends to data from Excel models. Portfolio managers can bring up from their models key figures on the stocks or credits they are considering, alongside market data from third-party providers or accounting figures that may not be in the system. Integration with market data and research providers enables the system to filter sites automatically for particular companies.

Firms that make the strategic move to a research management solution stand to realise significant benefits in the front office: replacing tedious manual data collection and collation with automation; freeing staff to focus on decision-making and client service; centralisation of critical research data and standardising the research process; improved compliance readiness; and, above all, more thorough and accurate due diligence, leading to better investment decisions. In today’s turbulent markets, when firms are more pressed than ever to ‘work smart’, a solution like Advent Tamale RMS is essential for navigating the storm.

Mark Rice is senior vice-president and general manager of the Tamale business unit with Advent Software

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