Anthony Malakian: The Power of the Investor
Anthony says that while new reporting guidelines and technologies will help firms to make the business case to move away from spreadsheets in favor of automated systems, investors will hold the most sway in making this a reality.
Between staffing, technology infrastructure, legal and other costs, start-up hedge funds must run a lean operation. Trade-offs need to be made. As a result, many fledgling firms rely heavily on spreadsheets, not only for analytics and modeling, but also for order management, execution, portfolio management, and risk management.
Pomelo Capital was spun out of Barclays’ capital arbitrage desk. According to a Bloomberg report, the move was in response to the Volcker Rule, which stipulates that deposit-taking banks can’t engage in proprietary trading. The hedge fund officially launched in 2012 and now manages about $775 million.
Raj Sood, portfolio manager at Pomelo, says the firm did not want to have to rely on spreadsheets when it launched. He served stints at Bear Stearns, Goldman Sachs and Barclays, and there was always a push for automation at those firms. So to handle the firm’s portfolio risk management, he turned to TS Imagine.
There were many reasons behind Pomelo’s decision to go with an automated, third-party solution to manage its risk, such as the prohibitive cost of hiring developers to create a proprietary, non-spreadsheet-based system. But at the top of that list were the investors, themselves.
“It’s been our experience that they don’t feel comfortable making investments unless you have this type of risk platform,” Sood says. “People don’t like to see us managing our type of risk with a spreadsheet. You’re taking too much intellectual property risk, in my opinion, to try and build it yourself or do it out of a spreadsheet.”
I find it odd just how attached to spreadsheets Wall Street firms are and the extent to which they fear automation.
A Receding Tide
Gary Brackenridge, global head of Linedata’s hedge fund business, says that when many hedge funds launch, the trader and portfolio manager are often the same person, they know what they want to achieve, and a spreadsheet is acceptable to manage risk and order flow. But these processes can become embedded as the firm grows. The key is to know when automation is needed.
“Even very large funds today, their senior portfolio managers are running secret spreadsheets on the side because they find it easier,” he says. “Service providers still haven’t solved this as an industry yet. It’s not as easy to use anyone’s given platform as it is to use Excel. That tension continues to exist. You can walk into any fund manager—even a mutual fund company running $1 trillion—and you’ll still find spreadsheets all over the place today.”
Due to technological advancements and improved security in cloud computing, Brackenridge says “there’s not a sea change happening—it’s a slowly receding tide,” as firms look to incrementally make a change.
As an example, he says, Linedata recently signed a new client in Europe. The founders were going to take the spreadsheet route for order management and compliance, but the fund’s biggest investor said that from days one, it needed to have an automated solution. If investors become more demanding at launch, perhaps that will accelerate the change to automation.
Here to Stay
Spreadsheets aren’t going anywhere, as illustrated in Kevin Roose’s book, Young Money, which follows eight young brokers managing menial tasks after getting their big break on Wall Street. Part of what Roose, who writes for New York magazine, describes, is how for some of these newbies the entire day consists of building spreadsheets and entering data—generally mindless stuff.
I find it odd just how attached to spreadsheets Wall Street firms are and the extent to which they fear automation. Perhaps it’s simply a case of fearing change. Whatever it is, it’s reminiscent of journalists who abhor online publishing and maintain that the future is still all about print publications. It’s a case of being blind to the new reality.
For a real sea change to happen, it’s going to have to be driven by investors. New reporting guidelines will have an effect, as will advancements in technology. Those things are important, but if investors become serious change agents, change will become a matter of when and not if.
The Dollar Milkshake Theory – Stress Testing the Potential Impact of a Sovereign Debt and Currency Crisis
Stress Tests play an important role in improving financial stability by enhancing market discipline and transparency. Here we consider the third example of these stresses based on current market conditions and show how the risk factors can be generated along with their relevant shock examples.
Since the start of the war in Ukraine, Western nations have imposed sanctions on many Russian individuals, businesses and state-run enterprises. Stress Tests play an important role in improving financial stability by enhancing market discipline and transparency.
Stress Tests play an important role in improving financial stability by enhancing market discipline and transparency. Clients leverage TS Imagine’s flexible and powerful risk engine to stress test a variety of specific scenarios. With Americans set to commence voting early next week, markets around the globe are watching carefully. Will the midterms disrupt the Democratic legislative agenda or tip in their favor? We ran two scenarios through our stress-testing engine, gaming the potential market impacts. Please note that these are hypothetical shocks and are not a prediction of any forthcoming events.