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PROPRIETARY SYSTEM

Hedge funds might choose to utilize their own unique combination of systems due to cost considerations. Excel frequently powers databases, while Python or Java may be implemented to develop user interfaces and APIs (application programming interface) for pricing and reference data.

However, a non-standard system might not perform as well as industry-standard platforms when dealing with complex portfolio functions, such as multi-strategy rebalancing.

Capital inflows and outflows, or position adjustments for valuation changes, can be managed using a custom-designed in-house program.

The value of assets under management (AUM) will determine the limitations of a proprietary system, as additional features may be required when AUM increases. The need for a compliance system is often the first indication that a formalized investment management platform is necessary for shadow accounting to the fund administrator.

FUND ADMINISTRATOR

A fund administrator is required when fiduciary responsibility is established and reporting of accounting and investment procedures is necessary to inform the investor group or the Internal Revenue Service (IRS).

The fund administrator is the official books and records of the firm (IBOR Investment Book Of Record). When a portfolio manager wants to simulate potential changes to holdings they would use a shadow accounting system commonly referred to as a portfolio management system (PMS).

The two reporting facilities are assumed to be identical and should reflect the same values. If there are differences between the two then there should be reconciling transactions to the shadow accounting system that square it to the fund administrator.

Differences can occur if the source for certain values are different between the two systems. 

Examples of differences are

• The mark-to-market method varies (ie- long positions are marked to the ask price instead of the bid price).

• Fund administrators may use a spreadsheet with section breaks that have calculations which perform a selected rounding of values. Those line breaks would need to be removed to create a flat file for a database. That database calculation would need the same rounding method as the official reporting facility.

COMPLIANCE

Investors select rules for how their capital can be deployed. The cross-section of investors' interests where rules don't conflict creates the framework for the investable universe.

Each time an order is submitted for execution, order parameters are run through the compliance engine for potential conflicts. The greater the number of rules or more complex holdings calculations (ie- maximum percent of assets under management (AUM)) can take longer to process which delays the time till execution begins. That delay will cause implementation shortfall and the values presented by transaction cost analysis (TCA).

MANAGED SERVICES

Outsourced middle and back-office functions allow for streamlining a small shop's operations.

Whereas there are costs associated with managed services, there is potential to bundle services through a prime broker that mitigate the expense. Prime brokers offer a full range of services depending on assets under management (AUM) which may include execution services, performance analytics reporting and industry research.

Without managed services a firm would need to have 

1) A middle-office person to submit and ensure consistency in booking trades and receiving required files (eg- fund administrator, third-party vendor (ie- transaction cost analysis (TCA)).

2) A back-office person to work with the prime broker when trades fail to settle or funds are not received.

OUTSOURCED TRADING DESK

Execution services that a buy-side firm will require can be handled either with 

1) An internal execution desk using an order management system (OMS) and an execution management system (EMS) for routing to execution venues including broker trading desks and crossing platforms. That platform is shared with portfolio managers who generate the orders from their portfolio management system (PMS).

2) An outsourced trading desk, usually at the firms prime broker. The buy-side portfolio manager would use the outsourced trading desk with an order management system (OMS) supplied by the prime broker. Communicating orders by voice or text is usually frowned upon.

EXECUTION MANAGEMENT SYSTEM

Higher values of assets under management (AUM) increases the likelihood that an investment management firm would have a buy-side execution desk staffed with portfolio traders. A trader can provide market intelligence and liquidity potential which the portfolio manager (PM) could use in their analysis.

An execution management system can be part of an investment management platform. An investment management platform incorporates portfolio management, order management and execution management. That platform could be provided by the firm's prime broker or the buy-side firm can lease a system directly from a vendor.

ORDER MANAGEMENT SYSTEM

Likely the stickiest application is the order management system (OMS) especially when the compliance system is part of the OMS. Once the compliance rules are set and the connections to execution venues are certified and operational (if the execution management system (EMS) is integrated with the OMS) then switching to a different OMS will mean potential for service interruptions during the transition. Even the best implementations can experience unforeseen difficulties.

The OMS should be able to filter, group and sort by significant groupings such as

• GICS (Global Industry Classification System) Code

• Portfolio Manager

• Execution Venue

• Symbol

• Many others, dependant on the available database

The OMS could also have the following order enhancement features

• Multi-select orders for a wave (a 'wave' is a group of orders that represents a 'slice', a percentage or value of each of the orders all sent at once). 

• Timed release of orders where the portfolio manager or execution trader wants to time the open or close of the market or any time during the trading day. There should be an allowance for the time it would take to check compliance as that might delay the transmission to the execution venue.

• Live ticket that remains on-screen and reflects order details of a selected order. Multi-select reflects the group summary.

• Live link to market data platform eliminates double entry of a security; once for the order and once for market data.

• Multiple customized persistent tabs with filter, group and sort features.

• Basket and list trading features.

• Fast send functions.

• Short locate facilitation

Columns should be available to sort orders that may reflect order values such as

• Market Value

• Quantity

• Price

• Side

• There may be others of particular interest to a selected user

There may be columns in the portfolio management system that are useful on the OMS blotter (the 'blotter' is a term which may be used by traders to describe the grid that displays orders). 

Columns such as 

• Position Average Price

• Prime Broker

• Other reference or derived data

PORTFOLIO MANAGEMENT SYSTEM

The portfolio management system (PMS) can be a very sticky system for a firm if there are extensive historical records. Each PMS vendor or product has a proprietary file format that needs to be coded to for each implementation. Columns of data need to be normalized for consistency.

• Switching between known vendors may be somewhat simpler since the file formats are generally recognized. 

• A firm coming off a proprietary system may need a deeper analysis.

• A firm using a fund administrators file may find a non-standard format (ie- section breaks by investment for summary purposes) that needs to be in a flat file format.

Calculations used for holdings valuations will need to be affirmed to maintain consistency from the old system to the new system. Differences can result when a value had been used by the firm that the vendor either may not have available or is calculating differently (ie- using the bid price vs. the ask price to mark-to-market short positions). Rounding of values should be checked for consistency in calculation results.

There are benefits to using a well recognized PMS in that the customer base has dictated the growth of functionality in the system. A large number of continuing customers and the longer the platform has been around likely means a deeper feature set. That may also be a limiting factor if software-as-a-service (SaaS) is desired. Another thing to consider is a focus on selected asset classes. If the investment management firm is focused on fixed income assets or commercial paper then that should be what the PMS can provide with both data sources for pricing and reference data and with functions in position adjustments or portfolio rebalancings (ie- duration, coupon, rate).

Partnership Accounting is an important feature if it's presented in a manner where more than one group of investors could use it. If one group requires significant changes to the processes then it becomes unusable for others. The opportunity and business objective dictates the allotment of engineering resources.

REPORTING

A robust reporting platform is crucial to understanding portfolio valuations. Scheduled distribution and shared realtime views expedite decision making. A user-friendly interface for report creation and modification facilitates an agile portfolio managers workflow.

There are a group of industry standard reports that all portfolio management systems (PMS) likely provide. Selected columns for parameter values by

• Security name

• Symbol

• Profit/Loss

Columns can be

• Cost price

• Quantity

• Commission

• Cost value

• Market price

• Market value

• % Profit/Loss

• $ Profit/Loss

Report displays can be grouped by selected attributes and sorted to highlight performance. Pivot table style applications are helpful as are exports to Excel and other generally accepted formats.

Some enterprising firms may have Python or Java and Sequel skills that could be employed to create a reporting tool. That reporting tool would need access to the vendor product using the vendor's API (Application Programming Interface). The more 'endpoints' with the API the better. That means that there are more proprietary data points in that vendors' application that are available to an external program.

Many vendors offer programming time for customized work (ie- $250/hour for an engineer to code the feature). However, that feature may then be made available to all users of the vendors system.

THIRD PARTY PROVIDER

A third party provider is any system outside the core platform for the firm that adds data or services to the firms operation. The core platform can be a proprietary system or a vendor provided platform potentially from the prime broker. Prime broker platforms may have data that is important to the investment management firm.

Portfolio management system (PMS) platforms may not provide deep performance reporting such as 

• Transaction cost analysis (TCA). When a firm has a special need they could utilize a provider then have results uploaded or transmitted to the PMS for use in position adjustment or portfolio rebalancing analysis.

• Pricing for non-standard assets (ie- digital assets) or reference data (ie- ESG Scores) may also be provided.

API

Application programming interfaces (API) opens up opportunities for enterprising investment managers to create a customized platform depending on the 'endpoints' available from the target data provider. If data accessed through API's are a core part of a firm's operation then the number of endpoints for the desired data should be a primary consideration when deciding between providers. Using Python, Java, Sequel and other methods, a firm can create their own system. Converting to a vendor system provides industry standard processes, calculations and data sources which may be desired over a proprietary platform.