“Just like the BRAIN research, the middle office needs to pinpoint attribution or risk and be able to show how a series of events impacted the final performance figures.”
The Brain Research through Advancing Innovative Neurotechnologies® (BRAIN) Initiative is part of a new Presidential focus aimed at revolutionizing our understanding of the human brain. It is all about unravelling the puzzle of how the brain’s parts work together.
The idea is to produce a revolutionary new dynamic picture of the brain that, for the first time, shows how individual cells and complex neural circuits interact in both time and space.
This will help researchers who are constantly seeking new ways to treat, cure, and even prevent brain disorders. The picture of the brain will fill major gaps in knowledge and provide unprecedented opportunities for exploring exactly how the brain enables the human body to record, process, use, store, and retrieve vast quantities of information, all at the speed of thought.
Putting together the pieces of a highly complex puzzle is what it is all about in the middle office too. Today’s performance management reports need not only to process and analyse disparate data types they also need to know the impact that they have on each other.
Indeed just like with the BRAIN initiative, middle office technology needs to allow for systems that can record, process, use, store, and retrieve vast quantities of information, all at the speed of thought to provide a full picture of what happened and why.
Like the researchers who are looking for new ways to treat, cure, and even prevent brain disorders, the middle office is looking to identify what happened and why and at what cost – to either replicate positive results or avoid negative ones in the future. What were the elements that contributed to the negative performance? Was the risk taken on a particular portfolio excessive? How did several factors combine to produce good performance?
A Holistic view
Demand is driven by several key industry trends including a shift toward risk-factor based allocation approaches, pressure from asset owners for a deeper understanding of both risk and performance profiles, and the race for higher performing investment strategies.
The system and the data need to have the capacity to add value and work together. Instead of data just coming in or leaving the system, there needs to be an analytic capability. This shows previously unseen patterns, measures performance according to the asset manager’s own criteria and shows various ‘what-if’ scenarios, plus anything else that the asset manager wants to do with the data.
Just like the BRAIN research, the middle office needs to pinpoint attribution or risk and be able to show how a series of events impacted the final performance figures.
On the attribution side, visibility and timely reporting gives a true and accurate picture of what happened and why and whether the strategy employed was helpful to that or detrimental or indeed, whether he or she was just lucky or unlucky.
The idea is to get to what happened and then look at the causal events surrounding it such as fx or stock movement to work out why that performance figure was reached. The key is to identify winning and losing strategies so that manager can repeat what is shown to work or avoid what is not working.
Expected return analysis, comparing what actually happened with what was expected to happen, is part of this. It sets out to identify how returns should look and why. It is an expectation of what the portfolio manager thinks will happen. Comparing the actual performance over the expected performance is valuable in itself.
Managers also value robust analytics to identify the potential cost of their actions. Understanding aggregated risk across all investments and portfolios is coming increasingly to the fore.
Part of this is stress testing which is all about finding the devil in the detail. In this case the devil is determining the exact element or elements that will cause the most risk and identifying the point at which that risk becomes overwhelming.
Effectively unpacking risk and applying stress testing to certain elements is all about gaining visibility as to when action is required and before that point is reached, where a close eye on things is needed. The end result is identifying what happened, why and what the cost of that was in risk terms.
But the middle office can only provide that if it has a best-in class performance, attribution and risk system that uses consistent and comparable data sources. A joined-up approach to performance and risk, and applying more advanced analytics is now technologically possible via systems that can combine data, apply advanced analytics and present the results in a user friendly format.
Speed is essential
The final piece in the puzzle is having a system that can do all this quickly – at the speed of thought almost. Having a system that can scale-up and work across any number of machines is clearly a bonus here. Being able to work those portfolios within 30 minutes rather than over 12 or so hours adds the ability to analyse results quickly and to act accordingly.
Having a reporting system that is constrained by the single system that it runs on is no longer acceptable. When the middle office kicks off a big calculation, it is effectively creating a giant workload of jobs. So the more machines available to distribute those jobs, the quicker it is going to get done. Employing classic parallel processing gives the middle office elasticity and the ability to scale-up those parallel processes to crunch that job queue.
It’s all about making incredibly complex a more simple process for the performance team to manage on a single system. In this case it is being able to know what happened and why all in the same place- just like the brain’s functions are contained within a single skull.
Combining the risk, attribution and performance on a single platform is now considered pretty important when it comes to dealing with a faster, more complex investment world, and to give firms a strong competitive advantage.
In short then, combined risk and attribution management identifies the positive and the negative and allows a quick response. This drives strategic value, competitive advantage and business growth ends.
- Just like a brain, the middle office has to undertake many computations instantaneously.
- Identifying casual effect and the reasons why and when something happened is crucial to performance.
- Quick decision making is the key to minimising risk and maximising gains.
- Comparing expected versus delivered performance is hugely beneficial.
- Modern systems can quickly combine data, apply advanced analytics, and deliver reports.