Unlocking Operational Alpha: The Foundation for Asset Management Success

The term operational alpha means “identifying and focusing on operational core competencies, with an understanding that improving operations and garnering efficiencies,” according to the 2016 article in Journal of Securities Operations & Custody.¹

Revenue pressure, popularity of passive funds, fee compression, and rising costs top the list of negative pressures on profits in the asset management industry.²

In this article, we will discuss how asset managers can make strides in unlocking significant operational efficiencies with process and technology and how the benefits cascade across the institution, landing on the bottom line.

Here are three impactful ways to drive operational alpha by generating efficiencies across the investment lifecycle.

1. Data integration in asset management for cross-functional data sharing

Financial institutions’ legacy systems and data silos hinder efficiency, risk management, and compliance. Firms should favor data infrastructure that allows teams to easily create their own tailored data tools, like portfolio accounting, for example. Tech solutions with self-service functionality through low-code or no-code tools remove bottlenecks by granting direct access to unified data, minimizing reliance on other teams for retrieval. They also streamline reporting and analytics by accelerating data access and automation.

Traditionally, analysts and portfolio managers rely on data teams to pull reports on fund performance, risk exposure, or market trends. With self-service solutions and a single golden source of the firm’s data, they can directly access consolidated investment data, apply custom analytics, and generate reports instantly, without waiting on IT or data specialists. Asset managers can save time and prevent errors in portfolio performance reporting. See our recent deep dive into the role of self-service technology in financial data management.

2. Advanced reporting: automating stakeholder insights & compliance

Cloud and AI-automated operational tools with oversight dashboards can help create tailored reports, allowing for more flexible and granular reporting. Fund accounting or risk and compliance professionals can customize reconciliation reporting to provide different levels of detail and transparency, breadth of data sets, and transparency.

Reconciliation tools can be set up to reconcile different types of asset classes and provide a high level of granularity for internal analysis and external reporting. For example, hedge funds that employ the popular multi-manager strategy need to access precise allocation expenses across all portfolio managers, as well as slicing and dicing by investor, by strategy, and by deal. Then, expenses are correctly allocated, and performance and fees are properly tracked across portfolio managers.

The time saved by removing taxing manual spreadsheet-based processes can be devoted to higher-value decision-making up the pyramid. Moreover, regulatory agencies are demanding more detailed, granular datasets and complex reporting to gain deeper insights into the risks financial institutions are taking. See our earlier article for guidance in keeping your reporting in sync with your evolving business.

3. Treasury automation: optimizing collateral & risk management

Investment lifecycle automation tools that streamline treasury management create an assortment of time-saving efficiencies. But in an area where the stakes are high and speed and accuracy are the critical factors to success, it amounts to more than merely time saved. Firms which automate margin processing and real-time collateral tracking will ensure accurate margin management and effective counterparty risk mitigation strategies. Risk managers can cleanly evaluate daily rates and availability from counterparties while assessing the impact on the firm’s positions. Hedge funds and asset managers that automate collateral management can optimize financing costs and maximize capital efficiency.

Scaling with precision: SaaS-based financial technology platform

Operational alpha is about bringing precision to all operational and data-based workflows – from reporting to accounting to treasury and reconciliation – arming funds and managers with the ability to perform any strategy at scale, expand rapidly, and efficiently meet all investor and regulator demands.

Many buy-side firms are struggling to execute their front-office objectives because of legacy systems’ inability to support modern middle- and back-office needs; and datasets siloed across multiple functional applications, fund administrators, and agents.