Hedge funds and traditional asset managers see broad appeal in OTC derivatives (OTCD)-intensive portfolio systems, according to a report by Aite Group.
Five years ago, the split of hedge funds to asset managers using these systems was roughly 75%/25%; today, it's closer to 58%/42%.
As OTCD usage has increased, Aite Group has seen demand for sophisticated systems grow, as well as opportunities for vendors.
Some investment firms do not require sophisticated multi-asset class solutions, but as the important discussion around structural changes in the OTCD market continues, it's highly likely that previously unlisted instruments will find a broader investor base. Many strategists planning an asset manager's five-year roadmap will seek to build flexible systems to support future growth opportunities and a diverse set of portfolios.
“These cross-over vendors from the non-buy-side community have transformed into core infrastructure providers,” said Denise Valentine, senior analyst in Institutional Securities & Investments at Aite Group. “At the end of the last decade, many were learning how to serve a buy-side client base, but today the firms are well on their way.”
Many of the vendors have developed buy-side work flows and connectivity options to trading systems as well as third-party services and solutions, which the mainstream investment management market requires.
Aite Group expects more competition in this category as additional vendors enter the segment or add advanced front-office analytics. Pending regulation suggests that more analytics will be required in the future, not less—so these vendors are positioned well. Formal partnering could further their efforts.
Research firm Celent expects buy side portfolio and risk management software spending to grow to $1.9 billion in 2015, driven by changing investor priorities, sophisticated investment strategies, and sustained regulatory pressures globally, investment firms need to raise the bar on portfolio management, risk, and investment operations.
In a report, Celent examines changes, emerging trends, and impact to portfolio and risk management practices in the context of broader shifts in investment market and business models.
“Beyond raising efficiencies in investment operations, firms must sharpen multiasset portfolio construction and risk optimization capabilities to accurately understand underlying drivers of risk and balance the risk and return equation for different investor segments,” said Cubillas Ding, Celent research director and author of the report. “The last global financial crisis was labeled as a perfect storm, for the right reasons. However, the next perfect storm could already be brewing.”
The investment industry is caught up in the crossfire of something larger than itself, with complex webs of compliance and risk-centric regulations around capital, transparency, clearing, and investor protection; socioeconomic challenges around retirement trends, pensions and financial services reforms, and the shifting dynamics of wealth between developed and emerging economies, according to Ding.
In response, investment management firms (asset owners, managers, and servicers) are implementing investment strategies that are more diversified, defensive, and “risk-transparent.” Market players are expanding multiasset class investing, balancing alpha-beta strategies, driving the application of risk factor-based investment approaches, and employing next-generation smart beta solutions, said Ding.
