investtech ftf webinar managing alternatives at a traditional asset management firm (for...

Managing Alternatives at a Traditional Asset Management Firm

April 13, 2016

www.investtechsystems.com © InvestTech Systems Consulting LLC 1

Which AI assets class is your biggest challenge today?

PE

HF

Derivatives

Credit/Debt/Loans/Mortgages

Real Estate and Infrastructure

Where are your greatest AI technology gaps?

Portfolio Management and Front Office

Back Office and Accounting

Data Management

Financial or Investor Reporting

What is the next AI Asset class on your horizon?

Participant Survey Questions



Pamela Bloom, Practice Manager of Alternative Investments

Jeremy Hurwitz, President

InvestTech Systems Consulting

• Mainstream investment management firms are adding alternative asset classes

• through direct investments

• placing AI allocations into traditional fund structures

• “funds of one” and separate accounts with firms that have AI track records

• Creates havoc for traditional front, middle, and back office - trying to squeeze a loan into a bond security type or a PE portfolio company into a traditional issuer

• What are the options - to implement another system, outsource, add more domains to their data warehouses, etc.

• We will discuss some of the problems and solutions and begin the process of systematically tackling the nagging questions about what should be being deployed to help support Alternative Investments


Professional Highlights

Relevant Experience

Education

Jeremy Hurwitz is an expert in Investment Systems Technology and Enterprise Data Management with over 25 years ofexperience.

His focus encompasses all disciplines including strategic architecture planning, data architecture design, operationaltransformation, maturity modeling, evaluation, selection, design and implementation.

He led business reviews, current state analysis, future state design, architecture roadmap, selection and implementation ofkey data management and investment systems including portfolio management, risk, analytics, performance, compliance,trading, accounting, client reporting, BI and data storage.

Prior to InvestTech, he served as VP of Investment Technology at Columbia Savings and Loan where he led trading andinvestment management technology related to managing the firm’s $6B high-yield portfolio.

• MBA, Portfolio Management and Securities Analysis Credits, UCLA Anderson School of Business • Honors Post Grad in Business Information Systems, WITS University, South Africa• BS, Computer Science and Applied Mathematics, WITS University, South Africa

Jeremy HurwitzPrincipal and Founder

Large Hedge Fund Manager – As lead EDM Architect in a complete operational transformation, Jeremy managed the strategic EDM architecturedesign and roadmap. He also assisted with operational outsourcing, selection of data warehouse, reference data, metadata and BI tools.

MassMutual – Jeremy led the EDM architecture design and deployment, which included evaluation and selection of business intelligence,reference data and data warehouse. He also designed and assisted with data governance roll-out.

Northwestern Mutual – Jeremy served as the strategic data architecture in designing and reengineering the replacement of legacy data platformsincluding reference data, data warehouse, integration and reporting.

Ares LP and Apollo Advisors – Jeremy worked collaboratively over 15 years on investment systems, operations and data management from start-up to current state.

Other Relevant Projects – Nuveen, T Rowe Price, KKR, CalPERS, HIMCO, OPERS, Ontario Teachers, Capital Group, Nationwide Insurance, AllstateInsurance, Principal Capital, Crescent Capital, Thrivent


Professional Highlights

Relevant Experience

Education

• Pam Bloom is an expert in alternative investments and buy-side asset managers with over 20 years experience.

• She has unique experience of providing services as both a consultant and as an in-house IT and Operations Director.

• She also has a comprehensive understanding of diverse business requirements and systems needs in trading, compliance,reporting and performance of the many alternative asset classes including, but not limited to, privates, syndicated loans,mortgage assets, high-yield bonds, swaps, etc.

• Pam has managed and implemented complicated investment management projects for asset managers with concentratedmulti-currency fixed income and alternative asset class portfolios including structured funds like CLO’s, CDO’s, Private Equityand Debt and Hedge Funds.

• She has also managed and consulted on many portfolio trading and accounting selections, implementations, and upgradeswith heavy concentration on performance, compliance and data conversion.

• CPA (inactive) registered in the state of California• BS in Business Administration from the University of Arizona

Pam BloomAlternative Investments Practice Lead

• Fortress Investment Group – Leading strategic effort, selection and implementation of investment sub ledger for permanent capital vehiclesincluding Mortgage REITS (RMBS/Repo’s/Mortgage performing and non performing loans/MSR’s/SA’s).

• Bain/Sankaty – Documented data warehouse and reporting requirements and evaluated Paladyne (Broadridge) and IVP Polaris as possiblesolutions.

• Crescent Capital Group – Led the entire separation and decoupling from TCW. Selected and then moved all middle and back office functions fromBNYM to SS&C/GlobeOp. Implemented Black Mountain Systems to wrap multiple out-sourced providers.

• DDJ Capital Management – Provided strategic investment decisions during high growth period. Led the selection of a OMS, Trading, complianceand DWH and implemented Black Mountain Systems across a hybrid of SMA;s and Fund accounts

• CalPERS ( Private Equity Group) – Led the requirements RFP for the selection of a new private equity service platform.• KKR Asset Management – Conducted a strategic architecture and business process requirements review process and assisted in the decision to

outsource vs. in house middle and back office.

• Ares Management LLC and Apollo Advisors – Instrumental in assisting the companies growth over a 10 years period from start-up to mature state


The Leading Buy-Side Investment Industry Consulting Firm Specializing in Strategic Design, Investment Systems & Applications Evaluation, and Technology Integration

• Founded in 1993 with offices in Los Angeles, Boston and Toronto

• 70+ Experienced Investment Systems Consultants

Former CTOs, CIO’s, Heads of Operations, Data Architects, Solution Subject Matter Experts Senior Management team averages over 25 years industry experience

• Serving over 400 Global Investment Management Firms

Institutional Managers, Advisors, Insurance, Mutual Funds, Wealth Managers, Pensions, Hedge Funds, Central Banks, Brokerage, Endowments & Foundations

• Core Practice Areas: Investment Operations, Front Office, Alternative Investments, Enterprise Data Management, Risk Management, Wealth Management

About InvestTech



• Alternatives Defined and Industry Trends

• Challenges with Managing AI Asset Classes

• Best Practices Solutions

• Questions and Answers

Agenda


Let’s agree on the definition of AI for the buy-side

By Investment Types

• Hedge Funds - Direct and Funds of Funds

• PE - Direct, Fund, Funds of Funds

• Real Estate and Infrastructure - Direct Asset, Funds, REITs

• Illiquid Credit

• Private Debt (direct lending, mezzanine, etc.)

• Distressed Debt (non-performing bank loans, mortgage & consumer loans)

• Structured Products (CLO/CDO, Credit Derivatives)

By Characteristic

• Illiquid - trades infrequently and with little volume

• Requires alternative methods for analysis

• Price infrequently and require valuation models

• Performance calculations require different methods (IRR, effects of leverage)

• Often not exchange traded

AI – the oldest ‘next big thing’


Survey of AI Investors

$-

$500.0000

$1,000.0000

$1,500.0000

$2,000.0000

$2,500.0000

Direct REFunds

IlliquidCredit

Direct HF Direct PEFunds

PE FoF FoHF

AI AUM Top 100 Firms

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Direct REFunds

IlliquidCredit

Direct HF Direct PEFunds

PE FoF FoHF

% Expected Growth


Definitions: Structures

One of the biggest challenges is that AI comes in many shapes and sizes and there are vehicles in addition to direct investment

• Manager/Sub-Advisor/Strategic Partnerships

• Funds of One

• SMA’s

• Funds of Funds

• Co-Invest

• Joint Ventures

• Publically Traded (MF, HF, 40-Act and BDC)

• On Shore/Off Shore and Tax Advantaged

The need to look-through and use the underlying holdings data drives changes in procedures and solutions


Industry Drivers

1. Larger allocation to alternative assets funded from traditional asset classes

expected to continue

2. Non-US alternates gaining greater acceptance – global exposures

3. Enables portfolio diversification and risk management

4. Driving Yield, Alpha and Beta

Investments with substantially distinct and uncorrelated returns from traditional

stocks and bonds with richer risk / return characteristics

5. As index and passive mutual funds becoming the “norm,” AI can be a key

differentiator of Managers (search for higher fees)

6. Barrier to entry has been mitigated by first generation of AI becoming

mainstream

7. Fund Managers willingness to provider greater transparency leads to new

acceptance to invest via SMA’s and Funds-of-One making it easier to manage




• Challenges of Managing AI Asset Classes



Agenda


Challenges - People

• Finding people that understand the nuances of all the different

AI instruments and structures

• Repurposing human capital takes significant training and time

to “get up to speed”

• Experienced resources are scarce for AI specific applications

• IT and technology custom development creates key-man risk

• Increased staffing costs for specialized marketing and client

service staff

• Scarcity of AI PM’s leading to buy-outs and mergers, further

driving up staffing costs


Challenges – Process 1/2

• Not a lot of lead time given to begin processing new instruments

• Need for more formal deal flow and pipeline solutions/forward

calendar automation

• Desires to capture and track CRM type fields and correlate to

Advisors/Funds

• Trade capture and settlement more manual and error prone

• Trades not entered into OMS often bypass pre-trade compliance

and allocation rules

• Different types of investment analysis and modeling

• Tracking of manger fee/compensation structures

• PE - Committed vs. Contributed capital and cash management


Challenges – Process 2/2

• More complex legal documents and T&C’s to capture

• Limited reference data providers and more manual process adds

risk to investment accounting and analytics

• Distressed asset valuation processes are manual and can cause

delays in closing periods and reporting

• Different / more complex performance measurement methods

• Complex exposure reporting – looking through the underlying

credit and counterparty relationships

• More demanding regulations and compliance restrictions on the

horizon


Challenges - Technology

• Most existing FOMOBO systems don’t natively handle AI

AI assets are stuffed into traditional asset class set up

• Proliferation of one-off spreadsheets

• Traditional vendors playing catch-up

DWHs and Marts don’t have specific AI domains

• Specialized vendor solutions lag the market

• Best-of-breed models require numerous specialized solutions and

interfaces

• Internal development = large undertaking = high risk

• Challenges with Total AUM and consolidated Reporting

Inconsistency in asset roll-up (Par vs. Quantity vs. Notional vs. RE, etc.)







Agenda


Best Practices Solutions

1. Assess insource vs. outsource opportunities Outsource providers making strides in breadth and depth of services

2. Select best-of-breed sub-asset class solutions Align new solutions to your data management and architectural strategy

3. Expand and consolidate data models to support custom AI data Flexible data structures to support AI instruments

Complex fund, product and instrument structures

Unified “gold copy” data fields with definition and ownership

Transparency into underlying and constituent data with extensive T&C’s

4. Build BI services to eliminate the spreadsheet mentality Self-service dashboards with analytics and click-through capabilities

5. Govern and Quality Control the AI data Enforce business data ownership and knowledge collaboration

Implement UI workflows and data quality routines to support manual processes


Outsourcing: Investment Value Chain

Confirm & Settlement of

Exchange Traded and

OTC contracts including Life Cycle events, Corp. Actions and resultant

cash flows

Confirmations & Settlements

Daily calculations

and movements of all margin

and collateral positions

Collateral / Margin Mgt

Risk oversight on Portfolio

Management activities

(exposure monitoring, risk profiles)

Portfolio Risk Oversight

Performance on all

structures (portfolios,

funds, composites) to mandated benchmarks, attribution

analysis

Performance Measurement

External client

reporting for all

investment vehicles

Client Reporting

Posting of all accounting entries and

production of accounts

Investment Accounting

Fund accounting,

NAV calculation

and monitoring,

daily & monthly reporting

Fund Accounting

Management of all

shareholder servicing

Transfer Agency

Safekeeping assets, cash availability,

reconciliation, income/tax

reclaims, monthly and

ad-hoc reporting

Custody

Referenceand Market

Data management

(Security Master File,

Pricing), Data Quality checks

Data Management

Asset gathering,

investmentresearch and

portfolio modeling,

trade order management & execution

Asset Mgt & Trading

Middle OfficeFront Office Back Office

Information Technology Services (SaaS, PaaS, DaaS, IaaS)

Focus on business efficiency and the need to secure optimum returns are stimulating investment in renewed approaches toasset servicing. Unlike more commoditized back-office functions such as custody and fund accounting, global sourcing ofmiddle-office operations is not a “cost race to the bottom”.

The service priorities are speed, accuracy and cost, with accuracy the most important factor, while 50% of asset managementfirms consider that cost is not an important factor at all when it comes to middle-office outsourcing.

1970’s2000’sOutsourcing Timeline

*Note that services for Alts specific lag the traditional offerings


Outsourcing: Landscape

Client coverage

Complete

Limited

Functional coverageLimited Complete

BNYM

State Street

JP Morgan

Citi

Northern Trust

Citco

Hedgeserv

SS&C GlobeOp

SimCorp

Morgan Stanley

SEI

Service Providers

with strong Alts

offerings


PE Market Analysis of Vendor Universe

Vendor Universe Assessment # Vendor Name Product(s)

1 eFront FrontInvest

2 Sungard Investran

3 Burgiss Group Private I, Private IQ

4 ViTech Systems Group EquiTrak

5 Backstop BackstopPM

6 3i InfoTech Framework

7 DAVIGOLD LBOffice

8 Relevant Equity Systems Equityworks

9 Analytx PEO

10 Vantage Software VantageSuite

11 Baxon PE12 e.Venture Systems Limited eVenture

13 Vertice Technologies AltaReturn

14 Koger Pentas

15 App-X AIM

16 ClearMomentum17 Digital Shape Technologies Webfolio

18 Sound Harbor Partners Trace Point

19 iLevel Solutions, LLC Ilevel

20 Burgiss Group PrivateInformant

21 Thomson Reuters LPXpert

22 NYPPEX NYPPEX

23 Pitchbook.Com Pitchbook

24 PrivateEquity DatabasePrivateEquity

Database

25 SS&C Technologies TNR Solution

26 SEi Investran/Geneva, DWH, Web portal

27 State Street Bank Private Edge/Efront

28 CITI29 JP MORGAN30 BNYM Private I

31 Northern TrustPrivate I, Private IQ, PrivateInformant

custom PE cash flow forecasting model, Private Outlook.

32 Portfolio Advisors33 AltResources34 Augentius

35 FLSV Fund Admin Services

36 Ipes37 Citco Fund Services

38 Brown Brothers Harriman & Co. Infomediary

InvestTech Market Analysis

Informal Vendor

Interviews or Demos

Vendor Profile

and Risk Assessment

Peer Assessment

# Short-List Type

1eFront

FrontInvestCOTS

2Sungard

InvestranCOTS

3BurgissPrivate I

COTS

4Vitech

EquiTrakCOTS

5Backstop Solns

BackstopPMCOTS

6SS&C TNR

Hybrid

7SEI

MultiHybrid

8JPMorgan

MutiService

9Citi Private

Equity ServicesService

10Northern Trust

MultiService

11BNYMMuti

Service

12State Street

MultiService


DataRepository

Potential AI Vendor Landscape

Middle OfficeIBOR

Front OfficeTBOR

Back OfficeABOR

B-Rock / CRIMS / T-Folio

Advent Geneva

JPM, Citco, NT, SEI, SS&C, BNYM, SSB

Weak...…Medium…….Strong

Traditional OMSs. Heavy investment in Derivatives. Less into Alts. Handle some classes (Bank Debt). Gaps in PE, REO and Loans. Risk increase with AI complexity.

Vertical AI Platforms present as best of breed in their AI niche. Typically customized to support single AI classes: PE, Loans, CDOs, Real Estate, Credit, Data Repositories

Strong integrated I-ABOR-EDM-Performance platform. Current H-Fund client adding breadth in derivatives and data service layers.

V. Strong ABOR-IBOR + Hedge solution across all security types. Weaker on proprietary DB and performance measure.

Range of service providers offering a full set of AI services or specific vertices – typically leverage the vendor systems listed above within their platforms

Summary observations

FusionInvest / Calypso / Summit / Murex

BMS Everest

Eagle, SimCorp

eFront, Investran, TNR, Dynamo, Vitech

Yardi, MRI

BMS

Polaris

MIK

Addepar

Broadridge

Investcloud

Vistaone

WSO

SimCorp


Normalized data environment to construct and implement investment portfolio management decisions, service clients, and manage risk

Next Gen Data Services Platforms

Flexile security classification

data

Full transparency look-through

Follow-the-Money

(strategy PL)

Aggregated, intra-day client portfolio

data/views

Consistency of computed &

analytics data

Data Sources

Advanced Refactored Data Repository

Investment Data OptimizationAggregation / Normalization / Grouping / Validation / Governance / Distribution

Data Optimization Platform

Market DataSecurities,

Reference, Pricing, Ratings, Analytics

Investment ManagersResearch, Reference Data,

Analytics Trades, Positions, Research

CustodiansSecurities, Reference,

Pricing, Holdings

Securities Accounting & Other Sources /

SystemsSecurities, Ref Data,

Pricing, Holdings







Agenda


www.investtechsystems.com

Thank you!

investtech ftf webinar managing alternatives at a traditional asset management firm (for...

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