I was extremely honored to be invited to chair the Performance Measurement and Risk track at TSAM NYC 2015 last week. Kudos to the organizers, panelist and attendees, as it was a very informative, interactive and enjoyable experience. Here are some thoughts and observations from discussions at the event:
· The Performance Measurement teams are one of the few groups in an investment management firm that interacts with every other department from front-to-back office, prospects and clients, and increasingly with regulators. They often catch errors (trade, pricing, reference data and accounting) before anyone else.
· Performance returns are the ultimate in story telling: A company’s strategy, research, Portfolio Management decisions, trader’s execution, client’s mandate expectations vs. benchmarks are all fully exposed. Data Visualization can help tell that story. Daily controls are key to ensure its accuracy.
· Most Performance teams now report into Operations, but there is a growing trend to report into Risk Management. Reporting lines have been in flux for years due to the first bullet point, above.
· Communication remains one of the biggest hurdles in resolving issues and ensuring alignment, which is exacerbated by email, Instant Messenger and text. It’s better to walk over and talk to someone if you can, or use a video chat if you can’t. The exception is to use email to document expectations with teams and vendors.
· From a project standpoint, many firms have difficulty keeping senior management involved and engaged in long term projects (more than six months). Agile project management can help alleviate that -- if done correctly -- by delivering iterative results. Most firms engage in Proof of Concepts (POCs) when selecting a new vendor in order to fully understand functionality and potential gaps, but agree POCs are better left for a final vendor or two if a bake-off is needed.
· Fixed Income Attribution is more commonly used for client communications, yet many front office FIA tools don’t match the official returns, creating a data management and operational challenge for many. This is a bigger challenge for multi-asset managers. (Please note that one of our Partners can help resolve this issue.)
· Cleared Swaps have not removed clearing risk, only transformed CCP’s into systemically important risk. Furthermore, the lack of cross boarder coordination is most evident in that Dodd-Frank prohibits the US from providing liquidity to the CCP’s, which will put the pressure on the Bank of England and ECB should a shock occur again. This transformation of risk is somewhat analogous to the creation of Credit Default Swaps after the LTCM crisis, a “credit risk reduction” vehicle intended to reduce risk with the unintended consequence of adding fuel to the financial crisis fire in 2008.
· At a round table discussion at the end of the day, it was noted how regulatory-driven bank balance sheet restrictions are adding volatility in the most “risk free” market of all: US Treasury’s. Traditional Capital Markets desks – those that remain -- are doling out liquidity based on relationships in order to keep their balance sheets in line; the slack is being taken up to some extent by hedge funds, insurance companies and even corporate treasuries. Again, what are the unintended consequences going to be?
· While this track had little discussion regarding Big Data, we had a number of very good conversations with people in the Data Management and Sales & Marketing tracks.
· The Performance Measurement teams are one of the few groups in an investment management firm that interacts with every other department from front-to-back office, prospects and clients, and increasingly with regulators. They often catch errors (trade, pricing, reference data and accounting) before anyone else.
· Performance returns are the ultimate in story telling: A company’s strategy, research, Portfolio Management decisions, trader’s execution, client’s mandate expectations vs. benchmarks are all fully exposed. Data Visualization can help tell that story. Daily controls are key to ensure its accuracy.
· Most Performance teams now report into Operations, but there is a growing trend to report into Risk Management. Reporting lines have been in flux for years due to the first bullet point, above.
· Communication remains one of the biggest hurdles in resolving issues and ensuring alignment, which is exacerbated by email, Instant Messenger and text. It’s better to walk over and talk to someone if you can, or use a video chat if you can’t. The exception is to use email to document expectations with teams and vendors.
· From a project standpoint, many firms have difficulty keeping senior management involved and engaged in long term projects (more than six months). Agile project management can help alleviate that -- if done correctly -- by delivering iterative results. Most firms engage in Proof of Concepts (POCs) when selecting a new vendor in order to fully understand functionality and potential gaps, but agree POCs are better left for a final vendor or two if a bake-off is needed.
· Fixed Income Attribution is more commonly used for client communications, yet many front office FIA tools don’t match the official returns, creating a data management and operational challenge for many. This is a bigger challenge for multi-asset managers. (Please note that one of our Partners can help resolve this issue.)
· Cleared Swaps have not removed clearing risk, only transformed CCP’s into systemically important risk. Furthermore, the lack of cross boarder coordination is most evident in that Dodd-Frank prohibits the US from providing liquidity to the CCP’s, which will put the pressure on the Bank of England and ECB should a shock occur again. This transformation of risk is somewhat analogous to the creation of Credit Default Swaps after the LTCM crisis, a “credit risk reduction” vehicle intended to reduce risk with the unintended consequence of adding fuel to the financial crisis fire in 2008.
· At a round table discussion at the end of the day, it was noted how regulatory-driven bank balance sheet restrictions are adding volatility in the most “risk free” market of all: US Treasury’s. Traditional Capital Markets desks – those that remain -- are doling out liquidity based on relationships in order to keep their balance sheets in line; the slack is being taken up to some extent by hedge funds, insurance companies and even corporate treasuries. Again, what are the unintended consequences going to be?
· While this track had little discussion regarding Big Data, we had a number of very good conversations with people in the Data Management and Sales & Marketing tracks.
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