Adaptation Via Collaboration in the Brave New World of Asset Management
The 10th anniversary of the Lehman Bros. collapse and the onset of the global financial crisis have generated this year countless newspaper and magazine articles, books and documentaries focusing on the events themselves and the profound changes that ensued in the years since.
For many in the industry, the fall of Lehman remains a vivid memory. But it is what followed that transformed financial services. Regulatory demands soared. Passive exploded, radically altering the competitive landscape. Multi-asset class investing became the norm rather than the exception. The coming of age of cloud computing, big data and big analytics utterly redefined investment processes. Even the predilections of investors shifted, with ESG and other alternatives rapidly gaining traction. And everything—everything—now happens at speed.
“The bottom line is that in just 10 short years, the business of investment management irreversibly changed, becoming far more difficult and complex, far more technology- and data-driven, and much more competitive,” said Nicolas Rossignol, Managing Director of French-speaking Europe at Axioma, Inc., a provider of enterprise risk management, portfolio management, and regulatory reporting solutions. “The challenges are clear. The question is, how—in realistic, practical terms—do you adapt as an asset manager?”
While that is indeed the question, for at least one firm, the answer to that question began to take shape in 2013. Five years after Lehman, Alain Robert-Dautun, the long-time Head of Risk for Sycomore Asset Management in Paris, saw the handwriting on the wall: Sycomore AM—and its risk-management process in particular—had to adapt.
“As a firm, we had to decide: what are our core competitive strengths? Because if we did not understand exactly what our value-added is as active managers, and if we did not focus precisely on those strengths in order to benefit our clients, then we were are diluting our capabilities and reducing our competitive advantage,” said Robert-Dautun.
The overarching challenge for the firm also had direct implications for the risk-management function under Robert-Dautun’s leadership.
“In the pre-crisis world, the role of risk management was very much a quiet, middle-office function—there was little dialog with the front office or other parts of the organization,” recalled Robert-Dautun. “But in the post-crisis world, risk management was rapidly becoming a critical, enterprise-wide strategic function.”
And so began a multi-year process that would result not only in the implementation of a state-of-the-art enterprise-wide risk management system at Sycomore AM, but a repositioning of the risk management process itself, as a key input to the firm’s overall strategic direction.
In fact, it had become clear to Sycomore AM’s leadership that risk management not only had to play a greater role in day-to-day operations, but in the overall strategy of the firm. And for that to happen, collaboration and communication among the front, middle and back offices had to be strong, consistent and in sync.
While these were genuinely ambitious goals, Sycomore AM had long been recognized by many of its peers as a thought leader and practical innovator. And, fortunately, the answers to at least some of the challenges facing Sycomore AM were less than two kilometers away, with Rossignol in the offices of Axioma.
“Alain and I had known each other for over 20 years—in fact, we did an internship together at the very start of our careers,” said Rossignol. “We had stayed in contact over the years and when we started to talk about the issues at Sycomore AM, the parallels between the challenges they were looking at and the things that Axioma Risk was built specifically to do were striking.”
Launched by Axioma in 2013, Axioma Risk was the most sophisticated risk-management solution on the market. In fact, when it was rolled out, some criticized the solution as overbuilt and too complex—though such views would change quickly as the difficulties facing asset managers continued to escalate.
Sycomore AM articulates its pursuit of alpha in classic active management terms as “a responsible investment approach, founded upon unique research methodology.”
“Our unique research methodology and our people comprise Sycomore AM’s core competitive strength and must be our focus,” said Robert-Dautun. “And to stay focused, you need to avoid wasting time and money on distractions. For us that means deploying the best solutions the market has to offer—solutions that are powered by the latest technology and can be tailored to our specific investment process in order to enhance our ability to deliver on Sycomore AM’s primary goal of creating value for our clients.”
Sycomore AM implemented Axioma Risk in 2016, and it appeared to be a good fit.
For starters, Axioma Risk responded directly to Robert-Dautun’s need to knit the organization together.
“In many firms, the front and middle offices measure risk using different methods, resulting in disputes and arguments,” said Rossignol. “Portfolio managers, for example, typically use factor-based models for evaluating risk as part of the portfolio-construction process, while risk managers use simulation-based systems suited to a broad range of asset types, market scenarios and portfolios. But Axioma Risk speaks a common language of risk.”
In fact, Axioma Risk was specifically designed as an enterprise-wide risk-management system, unifying the front, middle and back offices by generating timely, consistent and comparable views of risk across the entire organization.
The computational strength of the solution was critical to enabling Sycomore AM to achieve its vision. As a cloud-native solution, Axioma Risk was purpose-built to take full advantage of the on-demand horsepower of cloud computing, allowing Sycomore AM to run scenarios, stress tests and even the most robust analytics at will, and in real-time response to rapidly changing market conditions.
“Five years ago, many in the industry still had doubts about cloud computing, in terms of security and other factors,” said Rossignol. “But those doubts are gone. On the contrary, the cloud and the sophistication of our solution are essential attributes. Those things might not have been vital before the financial crisis, but they are essential now.”
Reduced costs were another benefit of a cloud-based system.
“The cloud allows clients rationalize their IT infrastructures and costs,” added Rossignol. “With the systems of the past, you had to be sure, for example, that your technology could handle the pre-trade analyses that were part of your monthly portfolio rebalancing process. So you ended up having to build expensive, powerful systems that were fully utilized only occasionally. With the elasticity of cloud computing, clients pay for what they use and nothing more.”
And the power of the cloud means speed.
“With the mounting demands of regulatory and risk reporting, not to mention analytics of all kinds, there is more and more data crunching to be done and clients simply cannot rely on the same systems and technology they were using even 10 years ago,” said Rossignol.
In addition, Axioma remains the only fully integrated multi-asset class risk solution on the market, providing analytics for equities, fixed income, credit, derivatives, etc.
Yet it was the flexibility of Axioma Risk that was arguably most critical feature from Sycomore AM’s perspective.
Sycomore AM now has one system calculating consistent risk characteristics for the entire firm, with the presentation of those risk statistics and reports adapted to meet the specific needs of portfolio managers, risk managers, the reporting department and the firm’s senior management.
“By using their own inputs, rather than those of a vendor or third party, Sycomore AM can configure its risk system so that the reports it generates are in sync and consistent with their own assumptions and viewpoints,” said Rossignol. “And that is absolutely critical, because it is the key to realizing the goals of your unique investment process. When we talk with clients, the one of the biggest criticisms of other solutions out there is that they are inflexible, forcing you to adapt to them, resulting in reduced control.”
Robert-Dautun concurred: “Working with Axioma helped us in our efforts to redefine our own risk-management process and organizational structure. The risk-management function is now fully integrated into Sycomore AM’s investment process. We now have the agility and power to analyze portfolios in multiple ways and to quickly gain valuable insights, even in very dynamic circumstances. And in today’s environment, insights and speed are essential to capturing alpha.”
“Asset managers today face increasingly challenging demands that require a high level of sophistication in terms of risk assessment,” added Robert-Dautun. “Access to extensive risk measures, data quality and a wide stress-testing framework were key factors in our decision to integrate this solution into our process. We now have the flexibility, in terms of both data and models, to tackle very difficult issues, and with complete control over the process.”
Said Rossignol: “Adapting to the brave new world of asset management isn’t about going it alone or plug-and-play solutions—because it just isn’t that easy. Sycomore AM defined their value-added, and then went looking for an enterprise risk solution with the flexibility to be tailored to that value-added and their unique investment process. Collaboration made it happen.”