During its recent annual client conference, RIMES hosted a panel discussion on the integration of performance and risk. The panel comprised Sean Murray, Director of Product Strategy at BISAM; Shankar Venkatraman, Global Head of Performance, Risk Analytics and Compliance at Citi; and Steve O’Brien, Head of Sales Engineering at RIMES. The discussion was moderated by David Spaulding, Founder and CEO of The Spaulding Group.
A quick poll of the audience suggested that most firms have not yet integrated risk and returns from any perspective; something that Spaulding suggested was a huge opportunity for first movers.
The challenges of integration
While the market is demanding an integrated solution, the technology is not yet fit for purpose. Sean Murray pointed out that integrated systems have not yet delivered both risk and performance capabilities to an equally high standard. The biggest challenge for vendors is to create an integrated system that does everything as well as a best of breed system.
Shankar Venkatraman ventured that risk and return are two halves of the same coin: investors take risks to get a return, and once that return had been achieved it is important to understand the risks that were taken. Due to this, Citi operates a joint risk and performance team. Tasks are divided based on data management, reporting and due diligence functions rather than along the traditional risk/return split.
From a data perspective, much still needs to be done to integrate risk and performance. Steve O’Brien shared RIMES’ experience: benchmarks are being used across risk and performance, but mostly in different systems. While it makes sense to bring this data together there are a number of challenges in doing so including finding the right people to manage the data, and sourcing adequate software solutions. Some firms are considering centralising their data in a warehouse, which can then be used to source the data requirements of downstream functions, including risk and performance. However, as use cases for data differ radically, this approach may not work.
For O’Brien, the central challenge of integration is ensuring data is suitable for business function. This was a theme picked up by all the panellists, with an important distinction made between the timeliness of data required for risk, and the quality of data required by performance. Murray made the point that an integrated system must be robust enough to generate the high quality results demanded by performance teams without impacting the nimbleness required by risk teams.
It’s not just the different uses of data that can cause challenges; data also comes in a variety of forms, creating further integration challenges. For example, some vendors apply dividends at the end of the day, while other do so at the start. Moreover, as some equity providers now provide their start of day positions, including joiners and leavers, share changes and dividend impacts, a benchmark might change over the course of one day. An integrated system must be capable of dealing with such complexity.
Murray struck a positive note, explaining that once these challenges are overcome, the industry will benefit from much improved data. This is because risk traditionally has strengths that performance does not, and vice versa. Joining the two will improve the whole.
Venkatraman was similarly positive, particularly when it comes to the potential for big data. For Venkatraman, the benefit lies in being able to run ‘what if’ scenarios on data to understand what your position would be now if you had acted differently. Clients are demanding this depth of information to help them make better decisions.
One other key area of debate was around whether firms should look to hosted data solutions or use solutions deployed on their own premises. The benefits of hosting are clear: it reduces time to market, makes implementation easier, and provides firms with access to ongoing software upgrades. However, the rise of cloud computing is leading to new questions around licensing. O’Brien made the point that firms, or their data representatives, must ensure that they have permission for each database instance from an index provider before storing it in the cloud.
The overall takeaway from the discussion is that there will be some challenges along the way to the integration of risk and performance, but these are surmountable and the resulting benefits will make the journey worthwhile.
You can read David Spaulding’s blog article on this topic here.