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Buy Side Turns to Multi-Asset Systems: Increasing Use of Alternative Investments Driving Interest

Investment firms are increasingly turning to multi-asset portfolio systems, as they provide an integrated solution to handle unique investment vehicles, risk management and collateral management, according to a report from Aite Group of Boston, "Multi-Asset Portfolio Systems: The Buy-Side's New Pied Piper."

Multi-asset portfolio systems allow firms to process all types of assets, including non-listed exotic instruments. In addition, many of them serve front-, middle- and back-office needs of asset managers. Eventually, Aite anticipates convergence of traditional and multi-asset portfolio systems.

The global portfolio systems market, which supports all types of asset management firms, had approximately $2.32 billion in assets as of last year, and is expected to increase 15% to reach $2.67 billion by 2010, the report states.

The sell side has used this technology for a long time, and in the past couple of years there has been a push to the buy side, said Denise Valentine, senior analyst at Aite and author of the report.

What's driving the interest is the continuing push toward new investment strategies, whether it be alternative investments, new asset classes or expanding to new regions throughout the world, said Andy Nybo, senior analyst at TABB Group in New York.

Most of the market for multi-asset portfolio systems, 54.4%, is concentrated in North America. There's another 31.3% in Europe, 12.8% in the Far East and Australia, and 1.5% in remaining regions. By 2010, Aite expects the global allocation to shift slightly to 53.4% in North America, and increase to 32% in Europe, 13.3% in the Far East and Australia and 1.6% in remaining regions.

"Multi-asset portfolio system providers will take share from the traditional asset management technology vendors in both start-up and replacement sales," the report states. "The most direct target is the hedge fund market, although some very large hedge funds utilize proprietary technology."

Another reason for the appeal of multi-asset portfolio systems is the increased use of derivatives, especially in hedge funds. The over-the-counter derivative industry was reported at $415 trillion at the end of last year. OTC derivatives are being used more by hedge funds, as they seek out larger returns, Valentine said.

As hedge funds diversify more and expand their book of investments and clientele from pension plans to endowments, they need to service a breadth of customers, Valentine said.

Derivatives have been labeled as speculative by some in the industry, but more traditional firms and portfolio managers are looking at them in a new light to enhance returns, Nybo said.

In order to use derivatives and other, exotic products, hedge funds and asset management firms need technology systems to manage intricacies such as valuations, different currencies and increased activity, Nybo added.

In the future, the multi-asset portfolio systems will evolve to include not only OTC derivatives, but advanced risk analysis and instrument valuation modeling, the report states.

Vendors are starting to acquire firms to enhance global reach and capabilities. In 2005, Linedata Services acquired Beauchamp Financial Technology, and last month. Fiserv bought CheckFree.

As more services start to blend, companies will look to acquire the needed software, driving yet additional consolidation and mergers and acquisitions in the industry, Valentine said.

Still, not every firm is racing to buy the technology, for multi-system platforms are not conducive for every firm. Portfolio systems will vary in functionality, such as depth of accounting and other components, Aite states. Many portfolio systems do not have deep accounting capabilities, and some investment firms, such as pension funds, require a lot of accounting regulation checks that the technology doesn't offer, Valentine said.

The systems are also not likely to have automatic reconciliation features, trade compliance or performance measurement, she added.

Typically, firms will wait until they reach a critical mass size to implement the technology, as there are costs associated with integrating the technology and training employees, Nybo said.

As with any new endeavor, implementing multi-asset portfolio systems is not without its headaches. "The learning curve is quite sharp," Valentine related. "These are complex exotic instruments that are quite unique, and establishing them takes time," she said.

A vendor company cannot establish a portfolio system overnight and put it out in the market, she said. In fact, many vendors have been working on the technology for several years.

One challenge for vendors has been implementing the technology at buy-side firms, due to the technology not having a standard template throughout the industry.

The buy side is a different world and much more reliant on vendors to support the implementation of technology. The sell side has a lot more internal resources and often can have as many as 20 people working on implementing a new technology system, Valentine explained.

Every level has been a learning curve for vendors, and they are still learning what the buy side needs and wants, she added.

Hedge funds are frustrated with the process, as well. Hedge funds have spent millions of dollars on implementation of such portfolio systems, not including software, Valentine said. The process has caused a disruption of operations, where the technology was supposed to be implemented by a certain date and it's taking several months longer, she said.

Additionally, there have been growing pains for third-party integrators hired by vendors to implement the technology. Since hedge funds are unique and always changing, the integrator has to learn how to implement the technology from one hedge fund to another because there is no standard template or procedures, Valentine said.

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