The Alternative Investments industry has grown exponentially over the past decade. This growth has accelerated business and system complexity. Alternative investment firms have expanded across asset classes and are facing added system integration complexities, compliance measures and increased requirements for LPs (Limited Partners).
With investors expecting improved reporting across multiple channels, compliance and regulatory requirements becoming more rigorous, enhanced operational efficiency is required. Regulations such as AIFMD, IFRS 17, SFDR and other directives require changes to systems, distribution, communication and reporting requirements. A growing scrutiny of fees urges fund managers to focus on operational efficiency.
As a result, Alternative Investment managers need to rethink their approach to (enterprise) architecture, information systems and data management. On the business side, they are pursuing new approaches to optimise profitability, manage costs and enhance their decision-making and compliance capabilities, including sophisticated data and analytics techniques.
What’s more, Alternative Investment firms -as well as the wider Financial Services sector are coping with data privacy and data security challenges alongside a move to the cloud or hybrid environments. With complexity mounting, recent developments in the market are causing disruption to the industry across Europe, with deal-making and fundraising being impacted.
“Against this backdrop, this whitepaper addresses the main challenges in IT and data migration for Alternative Investment managers”, making the case for investing in innovation and suggests priority areas for solutions.
- OVERCOMING THE LEGACY BARRIER
- BRIDGING THE GAP
- OVERSEEING THE IMPACT OF IT MIGRATION
- UNLOCKING THE VALUE OF DATA
- KEEPING UP WITH CHANGE
- ENGAGING WITH STAKEHOLDER GROUPS
- CONCLUDING NOTE
- INTRODUCING LEADINGMILE
1. OVERCOMING THE LEGACY BARRIER
Legacy systems have proved reliable in the past, but to maintain
momentum, Alternative Investment managers should push forward
with rapid investment in new technologies.
Legacy systems manage massive amounts of data and transactions. These systems must be able to integrate with the rest of the architecture to maintain relevance or integrate across vendor platforms without causing conflicts.
At the same time, obsolete systems may cause a multitude of problems. For example, staggering maintenance costs, data silos that prevent system integration, lack of compliance to regulations, and security breaches. Legacy may also slow down application development, impact cooperation and halt innovation.
Legacy can also become costly in time as overall technical support experience is complex or can lock businesses into particular providers, whereas the lack of vendor support may lead to operational problems.
Alternative Investment managers will therefore need solutions that are extremely agile to meet the evolving needs of disparate branch locations, new technologies and the vanishing network edge.
2. BRIDGING THE GAP
Although operational expenses for maintaining legacy systems will increase over time, the true cost lays in loss of business opportunities and competitive edge. At some point in time, mainframe data, debt systems or Excel spreadsheets will therefore need to be migrated for easier access and integration with BI platforms, data lakes, analytics tools and the cloud.
Alternative Investment managers need to critically examine their IT architecture, assets and legacy applications and systems to bridge the gap. Legacy systems must be capable of embracing new technologies such as artificial intelligence (AI) and machine learning as well as wider data governance and cloud solutions. A number of hedge funds are already using AI to analyse masses of data, predict corrections in supply and demand imbalances, and forecast market movements for tactical asset allocation.*
What are the potential risks and costs associated with disrupting the current applications on the system? Migration or modernisation should therefore begin with a clear (IT and business) strategy and an assessment of the IT infrastructure. It is imperative to create a roadmap and cost analysis for achieving improved performance, operational support, and cost management. In this process, the total cost of ownership (TCO) should be calculated by including future cost of continuous development, system maintenance, mandatory upgrades and application maintenance.
CONSIDERATIONS TO BRIDGE THE GAP
- Before starting any type of migration (cloud, on-premise, hybrid, virtual or combinations thereof), consider application dependencies, the age and resilience of hardware and software, and its interoperability with other systems, the possible hardware failure rate and the overall performance of the system.
- There is neither a silver bullet nor a one-size-fits-all approach for any migration. It is up to the migration expert to grasp the Alternative Investment manager’s unique exposures to risk and risk tolerance. A deep and holistic understanding of business needs, technology challenges and risk profile from all angles is key to success.
*Source: Artificial Intelligence Sweeps Hedge Funds, BNY Mellon, March 2019
3. OVERSEEING THE IMPACT OF IT MIGRATION
Many IT transformations and implementations fail – and many Alternative Investment managers remain hesitant in deploying a full-scale migration. With such a complex transformation to undertake and outdated architecture to resolve, firms are set to encounter obstacles of all kinds.
Alternative Investment managers’ operational focus is mainly targeted towards four areas:
- strengthening the front office
- enhancing client engagement
- rethinking their technology
- operational support models
Operations leaders therefore have a high degree of responsibility for these initiatives—and excelling in them can help achieve the firm’s operational and strategic goals.
Alternative Investment managers can implement a scalable and efficient operating model by:
- Establishing an enterprise data platform
- Consolidating business functions onto core platforms (CRM, Investments, Risk, Finance and Accounting)
- Setting up a data office, enterprise data governance and data quality measurement
- Understanding their profitability drivers across the fund, product and client
- Enabling product and distribution teams to focus on the most profitable clients and services
As the cloud is an increasingly-implemented destination for IT migrations, there are a few points that need to be covered to ensure efficiency. First, it must be considered where the cloud journey fits into the organisatio’s business strategy. Secondly, a firm must find opportunities for alignment of vision. A well-aligned strategy with a supporting business case and well-planned migration plan sets the proper groundwork for a successful adoption.
CONSIDERATIONS TO OVERSEE THE IMPACT
- Finding the right IT solutions for legacy systems with aging IT infrastructure starts with the right analysis and a profound understanding of their operating model.
- Whether on-premise, to the cloud, a hybrid across the cloud, or a co-location datacentre, system or data migration is always challenging. Having a seasoned migration partner and a well-thought-out migration methodology are key to a successful change.
- An industry-proven migration methodology to plan, prepare and execute the migration is therefore key. For example, when considering migration to the cloud, Amazon Web Services’ 6Rs provide guidance: Re-host, Re-platform, Re-purchase, Re-factor, Retire, Retain.
THE 6RS OF CLOUD MIGRATION
Amazon came up with six strategies their customers commonly use in cloud
migration. They are:
- Rehosting—This involves moving applications without any modification. Rehosting is useful for businesses that want to scale quickly.
- Re-platforming—With re-platforming, organisations slightly modify applications, but leave the application’s core architecture intact.
- Repurchasing—Transitioning from perpetual licenses for systems to SaaS models.
- Re-factoring—Also known as “re-architecting.” This centres modifying an application’s architecture and even rethinking how it is developed. This approach is useful if businesses desire to add features, performance, or scale in a way that would be difficult in the current IT environment.
- Retiring—Retiring involves assesses which applications are critical and which are not, and getting rid of what is not needed.
- Retaining—Retaining means holding on to business-critical applications that require factoring in order to be migrated.
Source: 6 Strategies for Migrating Applications to the Cloud, AWS, Stephen Orban, 1 November 2016
“The LeadingMile team have been managing the data migration and data analysis from the legacy situation to the new eFront system. They also provided the eFront expertise required to design a generic data model as well as the technical skills to perform the ETL processes.”
Manager Implementation at a leading Dutch pension fund.
4. UNLOCKING THE VALUE OF DATA
All over the Alternative Investment Industry, managers are beginning to see data as an asset rather than a risk. They should push forward in this endeavour. Alternative Investment managers should also invest in data management, data aggregation, data science, data analytics and insights to accelerate their digital transformation journey.
Data consolidation has become key for effective workflow processes across the front- and mid-office. To get there, an integrated approach is required to tap into a single source of data for daily investment management, risk management, compliance, internal controls, performance evaluation/attribution, portfolio accounting, regulatory and investor reporting.
Such an integrated approach to data and process flow management will provide improved oversight and adaptive approaches to dealing with high correlations between credit, market, liquidity, operational and regulatory risks.
The quality, accessibility and sound analysis of data will help Alternative Investment managers conduct their operations more effectively and make better investment choices and operational decisions on a daily basis.
Building a foundation data platform will become the starting point for improved investment insights. As data and analytics are key enablers for growing revenues, reducing cost and managing risks more effectively, the increasing availability of industry-specific data through data lakes or data virtualization is more important than ever.
CONSIDERATIONS TO UNLOCK THE VALUE OF DATA
- Evaluating performance and generating reports often requires complex consolidations of data.
- Unstructured and manual processes as well as inexperienced or untrained staff result in frequent errors in investment administration data.
- Creating a data-driven business intelligence (BI) platform will help the entire organisation develop a deeper understanding of client needs.
- Many Alternative Investment managers lack technical capabilities to utilise automation in their data migration projects or process. Using data and analytics techniques can help them to:
- Analyse large data sets and draw insights that help them forecast market trends and speed their decisions on investments
- Open windows into risk profiles, allowing funds to optimise their portfolios
85% of leading Financial Services firms say that data is their most valuable strategic asset but only 16% consider themselves ‘excellent’ at extracting value from their data.’
Source: EY, The science of winning in Financial Services
5. KEEPING UP WITH CHANGE
The European asset management industry continues to face a challenging regulatory environment, with a series of long-running initiatives and looming new proposals. Keeping up with change has become the norm – and requires a process of continuous development.
Due to changing regulators’ reporting requirements, Alternative Investment managers continue to find themselves in a new regulatory reality. Regulations such as the EU Alternative Investment Fund Managers Directive (AIFMD), EU Taxonomy Regulation, SFDR (see box) and KYC requirements, have imposed increased compliance measures on the Alternative Investment management sector.
DATA IMPACT OF SFDR
In the face of upcoming regulations – SFDR and CSDR – data is now more critical than ever. In order to provide the transparency needed to make informed decisions, producing quality data quickly has become key. As of March 2021, the new Sustainable Finance Disclosure Regulation (SFDR) will come into effect. One of the challenges for asset managers lies in collecting, calculating and processing (ESG) data correctly to fulfill the reporting obligations (see box).
A key aspect of redefining operations is staff. Talent scarcity is the number one challenge for many Alternative Investment managers. It will come as no surprise that they are competing for the same talent as the BigTechs like Google, Facebook and Apple. The human element and the accompanying set of skills must therefore evolve – alongside technology.
CONSIDERATIONS TO KEEP UP WITH CHANGE
- Continuous development is a must to keep up with ongoing change.
- Digital transformation has become a strategic imperative. New digital initiatives and upcoming regulation will drive the need to integrate all enterprise data sources.
- Changing the mindset and establishing a data-conscious culture throughout the business are required to keep up with change.
- As data management and reporting are moving from the back office to the front-office, creating ownership among portfolio managers is key.
“One of the challenges of SFDR – the EU Sustainable Finance Disclosure Regulation – for asset managers is in collecting, calculating and processing ESG data correctly to fulfill the reporting obligations. A first step, among many others, is to assess the sustainability risks, which may
impact their own activities with quantitative and qualitative metrics and accurate data, and produce internal reports. More in particular, processing data as to so-called principal adverse impact indicators in the investment process, if and where considered by asset managers, will be one of the key challenges.”
Randy Pattiselanno, Manager Strategy & Regulatory Affairs, DUFAS
DUFAS represents over 95% of the Dutch asset management market, both retail and institutional business. Website: www.dufas.nl
6. ENGAGING WITH STAKEHOLDER GROUPS
Not involving key stakeholders is one of the headaches in system
migrations. Not communicating with the business comes next. Stakeholder engagement is imperative throughout the development,
testing and implementation phases leading up to the go-live of the
ALIGNMENT ACROSS ALL STAKEHOLDER GROUPS
Developing and sharing a master migration plan and execution structure provides a sound basis for alignment across all stakeholder groups. The master migration plan reveals the sequence of events needed to migrate applications, whilst minimising business disruption. Building this schedule requires buy-in and participation from the entire organisation.
CONSIDERATIONS TO MAINTAIN ALIGNMENT
- Alignment across all stakeholder groups is vital. The importance of assigning accountability is also important in this process.
- Data governance is key: who has the rights to create, approve, edit, or remove data from the source system, and document that in writing as part of the migration plan?
- Keeping the lines of communication open will prevent issues, including mistakes due to misinterpretation, lack of clarity or frustration.
“LeadingMile were able to provide an accurate assessment of the challenges at hand and managed to clarify the data disclosure requirements right from the start. We needed to be challenged and the LeadingMile team was able to do so successfully.“
Manager Implementation at a leading Dutch pension fund.
7. CONCLUDING NOTE
The introduction of disruptive technologies is already reshaping the industry and will continue to do so in the years to come, at an even more rapid pace. In this process, new technologies will act as a driver to increase transparency while reducing costs.
Alternative Investment managers must be able to address their system and data issues as they deliver upon their objectives in an ever-changing digital landscape. In this process, profitability, system agility and organisational flexibility need to go hand in hand. Those Alternative Investment managers who actively embrace this process of disruption will be best positioned to succeed.
Having the right integration and implementation experts at hand, along with the best technology vendor partnerships, can position Alternative Investment managers to meet evolving IT and business needs and opportunities.
At the end of the day, Alternative Investment managers that are likely to succeed are those that:
- Lead with data-driven business intelligence (BI)
- Build robust data and technology organisations
- Re-align sales and marketing
- Upgrade the product development cycle
- Adopt a client-centric culture
Source: Global Asset Management 2020: Protect, Adapt, and Innovate, BCG, May 2020
- Calculate TCO by including future cost of continuous development, system maintenance and application maintenance.
- Continuous development is a must to keep up with ongoing change.
- Each type of Alternative Investment manager requires a different approach and a customised data migration toolkit.
- Managing risks is vital and post-migration validation is imperative.
- System migration comes with huge IT and business implications and requires a robust data migration framework.
- Outsourcing IT/data migrations is a worthwhile long-term investment.
- Having a trusted partner in place to help manage the IT/data migration is key.
8. INTRODUCING LEADINGMILE
Delivering tangible progress in the Alternative Investment industry and wider Financial Services sector requires the right sensitivity to problem-solving and solution provision. We can help clients provide the technical capabilities to utilise automation in their system and data migration process.
LeadingMile is an affiliated partner of eFront, (www.efront.com), the leading software provider of end-to-end solutions dedicated to the financial industry with a recognized expertise in Alternative Investments and enterprise risk management. eFront solutions are designed to meet the specific needs of: Limited Partners; General Partners; Family Offices, Pension Funds and Sovereign Wealth Funds; Fund Administrators; and Fund of Funds.
Our proprietary data migration toolset allows us to process large and complex data sets in a short time frame, with built-in software checks such as eFront Invest. Our bespoke data migration framework also contains the methodology to achieve a successful data migration in complex situations. We can help you migrate your business data with efficiency, accuracy and confidence.
There is life after legacy. We leverage the most advanced software solution for Alternative Investment management and seamlessly interface with core accounting and reporting systems, ensuring best-in-class Alternative Investment management.
To learn more, get in touch with us through the contact us form below.