The high cost of manual errors in portfolio management

When investment operations are executed manually, a missed keystroke can become a catastrophe. If a person “fat fingers” a single decimal incorrectly, they could be making an error in payment, pricing, or calculation by an entire order of magnitude. For example, a coupon calculation in a fixed income portfolio on a $100 million bond position, based on an errant coupon rate in the security master, could result in an egregious overpayment of $10 million.

Manual errors in sector exposures, risk weightings, and compliance classifications arenas are worse still. If a person at a private market fund enters the wrong sector classification for, let’s say the auto industry, suddenly their sector weight is off. The portfolio manager has an incorrect view of risk and exposure, making allocation decisions under the impression that they are overexposed to the automotive industry and underexposed to, let’s say, real estate. But in reality, it's the opposite. Without accurate sector classifications, credit risk indicators, and liquidity flags, investment firms risk misallocating capital, violating regulatory rules, and mispricing portfolios.

Automation makes everything speedy and more accurate when comparing information from multiple sources. You can have hierarchies for your sources so that you can be intentional about how you choose what information and where you put it. If you have some complex waterfall logic that's impossible for a human to remember, it'll just happen automatically.

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Outdated technology is holding investment firms back

A trader or analyst keys in the wrong price, while a fund accountant puts in the wrong counterparty. These incorrect execution and trade mismatches lead to undesirable effects including slippage, market impact, or compliance breaches that come with monetary penalties. The processing of inbound transactions begs for automation, especially with the influx of systematic managers using AI algorithms and more trading people moving towards higher volume businesses.² Manual setup of transactions and manual trade capture takes a long time. High-volume funds need to be automated to avoid hiring a dozen people who solely focus on processing trades. It's not sustainable from a financial or talent acquisition standpoint.

Automation in pursuit of T+0

With less time between trading and the settlement cycle to perform post-trade processing, eliminating manual processes and maximizing automation across pre-settlement processes is key. Everybody is in pursuit of T+0 to best manage liquidity and counterparty risk. But without real-time clearing and risk management, this can become onerous. Many smaller firms that do not have global teams are asking middle-office staff to stay late and work extra hours, another unsustainable approach. If you have a manual settlement process, there is only so much you can do. But if you are auto-confirming trades, the operations people are only tasked to where important issues need attention. Further, they don't have to manually go and send the notification to the custodian when it's done. When the trade is confirmed, it just goes out to them. Done and done.

Enhance risk management and accuracy in lifecycle events

If not processed correctly, corporate actions and lifecycle events can cause misstatements in holdings, valuations, and risk reports. In another operation that leaves little room for error, the manual processing of stock splits, M&A, or bond redemptions risks must be executed on the right day, at the right time, before trading starts again. Manual errors lead to incorrect P&L calculations and exposure mismatches, overstatements of assets, incorrect NAVs, or bad valuations. Imagine the ramifications of an imprecise valuation. Once again, AI-powered automation saves humans considerable time spent rifling through every price movement or position change to find outliers. In September 2024, Macquarie Investment Management Business Trust agreed to pay nearly $80 million to settle charges from the SEC that it overvalued approximately 4,900 illiquid collateralized mortgage obligations in 20 advisory accounts between January 2017 and April 2021.³

The higher the volume of business the greater the likelihood of damaging errors. With automated processes, portfolio managers are automatically notified well in advance when they have an election on deck. Cash management and reconciliation automation is another critical risk management advantage to be gained through advanced technology. Institutional asset managers need precise settlement date-based cash forecasts to ensure liquidity.

Operational efficiency prevents costly mistakes

While prime brokers on contractual settlement agreements will cover hedge funds, asset managers get charged overdraft fees if they miscalculate cash balances and don’t have enough funds to cover outgoing payments. If their reconciliation on their cash is wrong, they might get an unexpected overdraft fee ranging from 50–250 bps per day on the overdrawn amount. Hedge funds don’t get a free pass either, as their overspending means they need to borrow more cash, paid for with financing.

Modern cash management automation that prevents overdrafts also empowers portfolio managers to have more cash to trade. Instead, portfolio managers wake up each morning to everything fully reconciled, all corporate actions auto processed, with no unencumbered cash. They have their cash number, and they can work with a greater degree of confidence. Data quality suffers when processes are manual, because people either expend too much time to check everything or they don't have time to check anything at all.

Empower talent to spend less time on non-revenue generating tasks

Instead of hiring new people or asking people to work longer hours, buy-side firms can get more productivity out of their people — and keep them from jumping to another fund — by giving them cutting-edge investment technology so they can use their skills to impact the bottom line. More people are able to use advanced technology, which presents an opportunity to design your back office with automation, high data quality, and high-risk mitigation. Even better, self-service tools empower users because they don't have to rely on vendors or their tech team; they can make their own rules and customize according to their own departmental use cases.

A case for AI-powered automation in investment management

Starting from the security setup to trade capture, lifecycle events, through to margin management, by empowering middle- and back-office professionals to do their jobs with more accuracy and speed, a firm is also empowering the front office with the right information in real-time, giving them time back to be innovative. Portfolio managers no longer need to trade with fingers crossed, in hopes the downstream data is correct. Moreover, advanced investment lifecycle technology inoculates a firm against the occasional fat finger problem any of us may have on any given day.