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Cloud, the One-Stop Shop for Investment Management Innovation
Head of Investment Data Science, Asset Servicing, Americas
As seen in Finextra
Cloud providers are capable of operating technology, infrastructure, and data centres at a massive scale, and building new, sophisticated, and scalable applications at an optimum speed. Realisation of this has led to increased innovation in the investment management sector and, in turn, resulted in some of the largest banks, asset managers and hedge funds rethinking how their workloads are managed across the front, middle and back office.
Until recently, the investment management sector has been largely unchanged, with most traditional firms offering similar investment products and services to support their customers. To attract new investment and differentiate from their competitors, managers need to experiment and build new alpha generating strategies. This has been challenging over the last few years amid low margins, low yield, and low interest rates and with passive investments producing double digit returns YoY. This has resulted in increased competition, tighter regulation, and operational challenges – all pressure points that cloud providers can help mitigate.
To keep pace with this increased competition, investment managers are utilising technology, namely the cloud, to expand their services and capabilities to serve and attract new groups of customers. Driving automated services such as robo-advice or risk extinction, investment managers with cloud capabilities can effectively allow for the consumption of larger volumes of data, raising signals from their data and making new, interesting, and better decisions from derived information for their customers. Prior to the cloud, this was a challenge due to the historical limitations in the industry, such as the high operating costs associated with legacy infrastructure. The cloud has removed the undifferentiated heavy lifting of managing infrastructure, allowing investment managers to focus their human capital on innovation and new investment strategies while leveraging artificial intelligence and automation to optimise processes.
Finextra spoke to Brian Cassin, capital markets lead, Amazon Web Services (AWS); Paul Fahey, head of investment data science, Northern Trust; and Kyle Reinhardt, vice president, client solutions for Venn, Two Sigma’s portfolio analytics platform, about how cloud-based technology is uprooting traditional IT operations, business models, and strategies, and in turn, how cloud-based providers are supporting those transformation journeys for financial institutions.
Cassin highlights that investment managers are always exploring new ways to support their customers, and one new trend is offering their internal data and services to their trading partners or as an enticement to attract new customers. Cloud is enabling investment managers to experiment and innovate with these scenarios because if their strategy works they can easily scale to meet demand, and if it does not, they can shut down the project without many sunk costs.
Cassin adds that to keep pace with customer expectations, AWS customers are looking to accelerate their pace of innovation, leveraging data analytics and machine learning to drive new capabilities in areas like customer engagement, portfolio recommendations, digital assets, ESG scoring, and building new investable assets, while also automating middle and back-office processes for surveillance, reconciliation, and reporting.
Reinhardt adds that with the application of data science, portfolios can be better analysed in less time. “Venn combines Two Sigma’s expertise in research and data science with an easy-to-implement cloud-based technology to modernise the analytics experience for institutional investors. Our clients include asset owners, asset managers, and advisors who collectively manage trillions of dollars in AUM and use Venn to help perform factor-based risk analysis for manager due diligence, investment evaluation, and portfolio optimization” Reinhardt says.
Fahey, taking a slightly contrarian view, adds: “There are two things that investment managers are looking to do: generate alpha and distribute product. Everything else is outsourceable. So while managers use technology to enable them to support their clients, they’re not in the business to become technology providers.”
“Where we see that manifest itself is the creation of ecosystems where managers are doing what they are paid to do and what they want to focus on, but leveraging the other providers in the industry, whether it’s AWS as a cloud provider or Venn by Two Sigma as a technology provider. That makes sense for their business and other providers.”
Because of this, financial institutions have a role to play. “At Northern Trust, we are in the position to not only help investment managers make sense of their data, but also to leverage it in ways that enhance client acquisition and engagement,” Fahey comments.
Traditional financial institutions have seen this need and are providing ever richer tools that leverage their own investment experience along with cloud-based technology, such as Two Sigma’s Venn and solutions from Northern Trust as well as the Goldman Sachs Financial Cloud for Data on AWS, a suite of cloud-based data and analytics solutions for financial institutions, which aims to reconfigure how firms extract actionable insights and drive informed investment decisions.
Risk modelling for the investment management industry requires on-demand hyper-scale computing power and the ability to scale thousands of CPU cores, or processors, to analyse portfolio data and deliver trade risk analyses to clients. Fahey states that “there are certain things that are difficult to do such as crunching through large amounts of data without this ability to scale.”
However Northern Trust offers an alternative to this scale issue through their partnerships with fintech companies, which, according to Fahey, helps with the “digitisation of the front office, portfolio construction, research management, all the way up to execution. They’ve effectively digitised the investment manager’s process that was historically analogue --sitting in Excel spreadsheets or Word documents or email. Trying to pull all of that together was a challenge at the best of times.”
“Now, as we’ve seen more demand from investors around transparency into what firms are doing, the managers themselves can deliver on a near real-time basis, take some of their best ideas, recreate and reproduce them at scale. This is a key differentiator,” Fahey elaborates. Reinhardt, confirming that both Venn and Northern Trust serve a similar client base, agrees that a lot of the workload for the likes of portfolio managers, asset allocators and decision makers was, and in some cases still is, analogue.
Reinhardt says that Two Sigma “saw an opportunity to create a set of tools that are modern, easy to work with and highly scalable to quickly perform sophisticated analysis and better understand sources of risk and return across multiple asset classes.”
Cassin posits that some of the key questions that an investment manager should ask are:
- How do we simplify the end user experience?
- How do we remove or streamline manual/analogue processes?
- What is the best way to schedule and run large simulations and risk models cost effectively and without contention between teams?
- How can we improve collaboration and accessibility to data for quants as well as business users?
Cassin and Fahey referenced a recent Northern Trust and WBR Insights survey which found that a staggering 98% are already using, planning to pursue or are interested in incorporating data science or decision-support tools into their investment process by the end of 2023.
This statistic is consistent with the organisations that Cassin has spoken to. “This is 100% where they’re going. The more data they can pull in – and there’s a treasure trove – the more decisions can be made to create a customer 360 view portfolio, whether it’s scoring ESG or just doing quantitative research. Being able to tie different flavours of data together is an important way of thinking about how to build the next best ETF or the next best portfolio.”
In agreement, Fahey says that “we're going to see more disparate data sources, and greater volumes of data in each one of those datasets, all needing to be analysed. In addition to the sheer volume and scale of data, accessibility across internal teams needs to be considered as mentioned before. The other part of this is that we’re seeing an expansion of this accessibility across organisations, which technology is enabling.”
This expansion of accessibility is again increasingly possible because of the optimisation of human capital, as Reinhardt adds that nowadays “you can drop a Venn link into your Microsoft Teams or your Slack thread with your colleagues. They can pull it up and see exactly what you were working on and collaborate with you live on a web browser. Collaboration and accessibility of work has certainly been something that's really accelerated, and changed the way that individuals are working together in the investment community.”
Two Sigma Investor Solutions, LP operates Venn – see here for important disclaimers and disclosures. Venn is for institutional investors only.