Data Strategy Considerations for AUM Expansion

Balancing front-to-back operations

Traditionally, the front office dictates strategy, with middle and back offices responding to support those directives. However, successful firms find a balance in data sourcing, management, and analytics across all functions. This is how mature firms manage growth more efficiently and effectively.

Functional areas often work from their own checklists, but failing to take a holistic view can lead to redundancy and inefficiency. While each area should have decision ownership over different requirements, there is a lot of overlap in terms of potential consumers, and avoiding redundancy can allow for substantial resource and cost savings. Conversely, aligning stakeholders from front to back can improve operational and risk management outcomes.

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Varying data needs

Front office teams typically need near real-time data for intra-day decision-making, whereas middle and back offices usually require end-of-day data. Front office stakeholders may need a full universe of potential investments at their fingertips, where middle and back office may only need the data on held positions. Front office stakeholders want the flexibility to enter any transaction where they see an opportunity, despite the complexity and operational overhead to support, and the middle and back office needs to be ready to handle them to complete the investment lifecycle. The less that happens in isolation, the better to avoid costly and frustrating issues. Closer collaboration between these areas can mitigate costly issues and streamline the investment lifecycle.

The front office should clearly communicate expectations regarding asset classes, transaction types, and volumes to the middle and back offices. Those closest to the relevant issues and responsible for resolving them should have a seat at the table to discuss and plan to achieve the best outcomes. Such alignment helps ensure proper resource allocation, minimizes surprises, and reduces risks. Those closest to the relevant issues and responsibility for resolving them should have a seat at the table to discuss and plan to achieve the best outcomes.

Key components for the investment lifecycle

The primary consideration in going through the checklist is to determine whether existing data sources and infrastructure will be able to sufficiently accommodate a new strategy to ensure there would be no roadblocks to launch. This should include an evaluation of the firm’s ability to integrate ESG data and analytics into the investment lifecycle.

For sophisticated firms, taking the time to determine whether the existing sources and infrastructure are optimized for the additional strategy (and potential other strategies the firm is considering in the medium term) becomes a competitive advantage. Using this as a catalyst to make changes and drive transformation might seem daunting, but it has a material payoff in avoiding unnecessary issues and costs in the long run.

Front-office considerations

The front office is typically most focused on making sure the strategy will “work” in terms of generating target profit. This includes things like sourcing and licensing data for investment research, back testing trading models, and data inputs for trading models. The data management and analytics requirements, at a minimum, typically include a database and tools for research, back testing, and trading, along with an O/EMS to carry out trading.

The front office’s primary focus is ensuring the new strategy generates target profits. This involves:

• Sourcing and licensing data for investment research and back-testing, including ESG data.
• Using analytics tools to inform trading models and incorporate ESG factors.

Key questions include:

• Are current data providers adequate for the new strategy?
• Can existing platforms handle additional volume and model requirements, and ESG analytics?
• Can new or existing trading systems support new asset classes?
• What additional reporting needs will arise, particularly related to performance?

Middle- and back-office considerations

The middle and back office is most focused on making sure they can support the new strategy from an operations and data management perspective, like security setup and enrichment, trade booking, asset servicing, position keeping, portfolio accounting, compliance, risk, allocations, and reporting both back to the front office and externally to regulators and investors. Especially in multi-manager or pod shops, the middle and back office sometimes has the freedom to take a house view on data requirements needed to power these workflows and more commonly have authority to determine the best tools to perform various functions. The house view could be a single ‘one-stop-shop' data aggregator or a multi-source approach consisting of best of breed providers across asset classes.

These areas concentrate on supporting the new strategy through operational and data management, including:

• Security setup and trade booking
• Asset servicing, ESG metrics, and portfolio accounting
• Compliance and regulatory reporting, and ESG disclosures

Middle and back offices often adopt a unified approach to data sourcing, selecting providers that align with the overall strategy, including ESG considerations. This alignment can lead to a more efficient and effective operation.

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Foundational tools and data strategy

For front to back functions, there are similar questions to address:

• How are existing data providers considered for the new strategy, including ESG data sources?
• Will existing platforms, infrastructure, and tools be able to handle any additional volume or modelling requirements?
• What additional internal or external reporting requirements may result from this new strategy?

No one-size fits all approach exists with these key considerations as each business may have different priorities and strategies related to the data, and often a budget is determined based on a target return on investment (ROI) the data is expected to help generate, with some room for research and development data sourcing and analytics.

Firms evaluating new technology solutions to address the new strategy often consider whether it makes sense to implement solutions that would be more extensible to other existing and future strategies because consolidation has proven to reduce operational footprint and costs. This should include evaluating the ability of these solutions to integrate and manage ESG data effectively.

Key components of the investment lifecycle involve:

Front-office data management:

• Databases for research, trading model inputs, and ESG scores
• OMS capabilities to manage new asset classes and transaction volumes

Middle- and back-office data management:

• Security master and portfolio accounting systems
• Adequate risk and compliance frameworks

The following framework table lists some of the main data sources, licensing, data management and analytics consideration for the investment lifecycle across the front, middle, and back offices.