In pursuit of portfolio performance: buy-side firms adopt new technologies and strategies

Data, analytics and workflow capabilities play a crucial role in customising portfolio strategies, managing risks and addressing liquidity concerns amid economic uncertainties. Industry experts discuss the challenges in adapting to data-driven strategies, and the need for transparency and new technologies to navigate uncertainties and optimise performance

The panel

• Francesco Chioccola, Head of Vida Portfolio Solutions, J.P. Morgan
• Gurps Kharaud, Global head of equities digital markets, J.P. Morgan
• Maxime Hayot, Fund manager, BDL Capital Management
• Aymeric de la Rivière, Data scientist, BDL Capital Management
• Matt Talbert, Director, Teacher Retirement System of Texas
• Tobias Windmeier, Senior derivatives trader, Union Investment

What factors are driving firms’ approaches to delivering portfolio management capabilities in 2024?

Matt Talbert, Teacher Retirement System of Texas

Matt Talbert, Teacher Retirement System of Texas: The focus is always on portfolio outcomes – how an innovation can benefit risk-and-return characteristics of the portfolio. Additionally, what new ideas can we consider to enhance our teams’ productivity in evaluating and implementing these innovations? For 2024, the focus is on systems improvement and integration as much as strategy research. As strategies become more complex and operationally intensive, we need to spend as much time on improving the systems we use to monitor and manage our strategies as we do researching new ideas.

Tobias Windmeier, Union Investment: Our approach is primarily driven by the goal of sourcing and maximising internal alpha strategies. This strategy aims to generate more market-neutral alpha sources by leveraging internal expertise rather than relying solely on external managers. The focus is on efficiently making these internal strategies accessible across various portfolios, considering factors such as the number of funds involved and the trade execution efficiency. Additionally, external considerations such as interest rate trends and the performance of US tech sectors also influence decision-making, especially regarding factor hedging in response to market dynamics.

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Maxime Hayot, BDL Capital Management: In 2024, BDL Capital Management is primarily driven by the objective of maintaining a fundamental value bias in the portfolio management approach. However, alongside this core strategy, there is an increasing focus on incorporating and measuring technical factors such as size, beta and momentum. The rationale behind this shift lies in the acknowledgment that these factors don’t always align with fundamental rationales and can contribute to significant volatility in the market. By covering these technical factors, firms aim to enhance their risk management capabilities and ensure a more comprehensive understanding of market dynamics, thereby enabling them to navigate uncertainties and optimise portfolio performance.

 

In what ways are data, analytics and workflow capabilities from providers helping buy-side firms customise their strategies and effectively manage risks amid the uncertainties of the current economic environment?

Matt Talbert: We can run ad hoc analysis using the data and analytics from our providers’ portals, enabling us to slice attribution in multiple ways to suit our reporting needs. On the risk management side, we have the flexibility to adjust many of our strategy constraints on the fly as risks develop. For example, we can exclude a set of currencies from a strategy as geopolitical risks emerge. Additionally, we integrate data feeds from providers into our internal risk and portfolio management systems. This approach allows us to focus on research and leverage the providers as extensions of our internal capabilities.

Tobias Windmeier: We are actively incorporating external data while also developing internal models to reduce reliance on external sources. This flexibility enables us to access and process all necessary data, whether purchased or generated in-house. Additionally, we’re in the process of streamlining data management and analysis, ensuring our portfolio managers and research colleagues have access to efficient, high-quality data for market analysis and risk assessment. This approach enhances our ability to detect market shifts and adapt our strategies.

Maxime Hayot, BDL Capital Management

Maxime Hayot: We are an independent firm specialising in long/short strategies focused on European equities. At the core of our approach lies a concentrated stock-picking DNA, where we strive to uncover the most promising opportunities in the European equity market. However, recognising the significance of managing factor risks in a dynamic environment, we also dedicate a substantial portion of our efforts to constructing robust portfolios and continuously monitoring our exposure to risks.

To assist us in this endeavour, we have integrated J.P. Morgan’s Vida portfolio solution into our daily operations. Vida plays a vital role for our traders and risk managers, allowing us to optimise our investment decisions and better manage the risks inherent in our strategy. This collaboration with J.P. Morgan reflects our commitment to innovation and our ongoing effort to deliver optimal performance for our investors in a complex and ever-changing landscape.

We are increasingly leveraging custom baskets, either to gain exposure to specific themes or to mitigate risks. For thematic baskets, it is essential for us to swiftly construct the basket and accurately measure the effective biases. This allows us to capitalise on emerging opportunities or navigate market shifts efficiently.

Aymeric de la Rivière, BDL Capital Management: In the case of hedging baskets, the ability to precisely measure the risks within our portfolio is paramount. Providers offering advanced analytics, such as Vida, enable us to assess the impact of various hedging strategies on our overall risk exposure. This ensures our hedging decisions are informed and aligned with our risk management objectives.

 

How are portfolios adapting to handling liquidity concerns and the need for diversification?

Matt Talbert: In addition to standard asset liquidity, there is a need for an indicator for crowdedness. As the quantitative investment strategies (QIS) and systematic investing space grows, there is a concern that, during a crisis, several providers may employ similar strategies, increasing demand for market liquidity simultaneously. To address this, we aim to make signals and portfolio construction less conventional, hopefully rendering them more robust to flow-driven liquidity shocks.

Tobias Windmeier: We are addressing liquidity concerns by diversifying our portfolios across various equities and underlying assets wherever possible. Additionally, we utilise dynamic portfolio swaps to implement satellite strategies. For instance, we might create baskets tailored to artificial intelligence (AI) technologies or specific events, such as the outcome of the US elections. These strategies allow us to introduce single-instrument diversification across different portfolios, aiding portfolio managers in executing trades efficiently and effectively.

Aymeric de la Rivière: Our portfolios are adapting to address liquidity concerns and the imperative for diversification by transitioning from historically concentrated positions to utilising custom baskets, particularly on the short side. This strategic shift enables us to diversify our portfolios while simultaneously mitigating our impact on market prices. By leveraging custom baskets, we retain the ability to maintain concentrated bets alongside diversified positions, thereby striking a balance between targeted exposures and risk management in dynamic market conditions.

 

What are the challenges for buy-side firms in adapting to new technologies and data-driven investment strategies?

Matt Talbert: The challenges remain consistent across change management efforts: acquiring staff with the required skills; developing transition plans for system integration; maintaining a commitment to focus, cost and time; and rallying others around the vision of how new data and systems can transform the investment process. To be impactful, data-driven investment processes require a sustained commitment to the space. Building out systems and portfolios takes time, necessitating stable personnel to drive progress.

Tobias Windmeier: Determining the best sources of data and assessing their reliability is crucial. However, with limited resources compared with larger firms, we must prioritise our focus and allocate resources efficiently. We can’t afford to tackle numerous projects simultaneously, so we concentrate on identifying and capitalising on the most significant opportunities. This means navigating uncertainties and overcoming unforeseen obstacles along the way. For instance, while AI holds promise as a game-changer, the path to fully harnessing its potential is riddled with unknown challenges.

Aymeric de la Rivière, BDL Capital Management

Aymeric de la Rivière: The challenges for buy-side firms in adapting to new technologies and data-driven investment strategies stem from the rapid evolution of technical aspects, particularly factors and themes influencing the markets. While there’s a growing recognition of the importance of incorporating these advancements into investment approaches, BDL often faces resource constraints that limit its ability to develop all required tools internally. As a result, we rely extensively on the resources provided by prime brokers to access cutting-edge technologies, data analytics and market insights.

 

In the current investment landscape, how do firms ensure transparency throughout the trade lifecycle, and what measures can they take to overcome obstacles in achieving this?

Matt Talbert: Transparency throughout the lifecycle of a trade is critical as QIS become more complex and incorporate new types of data, signals and portfolio construction techniques.

The lifecycle of a trade begins with the research process. Banks providing novel and custom strategies need to provide insight into how strategy research was conducted, how objectives and parameters were set, and any sensitivity of outcomes to alternative specifications of the strategy design. Demystifying how the strategy rules are embedded in an index format can make complicated strategies less of a black box. Ongoing detailed communication on strategy performance decomposition and drivers, as well as risk characteristics, ensures results match expectations. Providing the code that generates the signals and positions is an additional step towards transparency for buy-side firms, enabling them to replicate the rule books.

Tobias Windmeier, Union Investment

Tobias Windmeier: I’m responsible for dynamic portfolio swaps. These swaps are utilised for implementing short- and long-term hedges, as well as executing trade ideas, for example, around AI or the US elections, as previously mentioned. To maintain transparency, we implement strict monitoring of trade risks and regularly rebalance our portfolios. Additionally, we proactively replace certain stocks within our trading baskets to optimise performance. While I oversee these processes, it is essential for every portfolio manager to continuously review and adjust their trades according to the prevailing market conditions.

 

How are providers adapting to buy-side demand for access to new datasets and capabilities to manage their strategies?

Matt Talbert: We think of our providers as partners in extending our capabilities. Acquiring and testing new datasets increases the breadth of our research, and we value that among the banks we work with. Providing capabilities to collect and clean large, novel datasets is part of the expertise we look to our partners to provide.

Tobias Windmeier: Investment banks are expanding their offerings to include various types of datasets and introducing new services tailored to meet the evolving needs of asset managers. Larger companies have the resources to develop their own proprietary models and employ advanced techniques such as natural language processing. However, for smaller and mid-sized firms, accessing external data inputs is particularly valuable. These firms often rely on external sources to enrich their research and gain insights, leveraging data provided by brokers and other market participants to enhance their investment strategies.

 

How do you see the demand for digital solutions evolving? 

Gurps Kharaud, JP Morgan

Gurps Kharaud, J.P. Morgan: We see digital solutions evolving across all walks of life. In financial markets, capabilities are continually expanding, resulting in increased interaction on digital platforms. This evolution creates a cycle: as digital solutions improve, demand increases, leading to the addition of more features, which further boosts digital adoption and interaction.
Digitisation enhances efficiency in interactions. Clients can now ideate and perform tasks independently, which streamlines our processes and improves overall communication. These digital solutions serve as modern communication tools between us and our clients, facilitating better collaboration and helping us meet their specific needs.

Francesco Chioccola, J.P. Morgan: We anticipate demand for a broader range of delivery channels, including mobile, as clients become even more comfortable integrating technology into their workflows. Interacting with and managing datasets will become even more crucial for clients to address their challenges and make informed decisions. As markets continue to evolve, so will the information and tooling needed to understand them. Our focus will be on enhancing the presentation of information and providing tools to effectively utilise it. Our goal is to provide insights and the capability to take action.

Matt Talbert: As our providers adopt new systems, an additional challenge we face is bringing all the interfaces into a single process that does not require our portfolio managers to learn multiple custom systems for viewing data and analytics. Having solutions that make these systems flexible is a key capability we would like to see.

Tobias Windmeier: The demand for digital solutions is on the rise, with various options available for adoption. While blockchain holds promise as the ultimate digital solution, its widespread implementation may still be a few years away. There are currently ongoing tests and trials, but trading and settlement processes have yet to fully transition to blockchain technology. Nonetheless, the need for digital solutions and automation is evident. Efficiency is key, especially considering the shortage of young talent available to sustain traditional work methods. Additionally, there is pressure from clients to reduce costs, prompting firms to explore digital solutions to meet these demands. Some investment banks offer assistance in setting up external digital solutions.

Aymeric de la Rivière: The demand for digital solutions is expected to evolve significantly, and is driven by several key factors. First, there is a growing need to access and leverage vast amounts of data for various purposes, including algorithm training and decision-making based on a multitude of data points. This necessitates solutions that can efficiently process and aggregate data in real time, enabling timely insights and actions. Technologies such as point-in-time data and real-time data processing capabilities are becoming increasingly crucial for meeting these demands.

Maxime Hayot: Moreover, there is an increasing requirement for tools that can handle data processing, aggregation and analysis in a manner that is interpretable and insightful. Solutions such as Vida that allow us to visualise our portfolios’ exposures are becoming more and more important.

Furthermore, the demand extends beyond just current data as we need more and more to run backtest and historical stress scenarios.

 

How are firms leveraging technology solutions to manage their investments across the portfolio lifecycle?

Francesco Chioccola, JP Morgan

Francesco Chioccola: Firms are using sandbox-like solutions such as Vida to explore diverse investment strategies, collaborate effectively and maintain control over shared data. They require intuitive analytic capabilities, allowing them to understand strategies in detail and customise analysis to their preferences. Additionally, they are using information around performance, attribution, risk and reporting to meet their own requirements. By digitising existing business processes and accelerating them, firms can streamline portfolio management.

The ability to harmonise data is particularly beneficial, allowing firms to easily visualise and interact with it. By enabling seamless data sourcing, visualisation and management, they can focus on making informed decisions rather than grappling with data complexities.

Gurps Kharaud: We developed our portfolio solution tool, Vida, to cater to all aspects of the investment lifecycle: from creation and management to analysis and reporting. The platform has been designed to serve portfolio management needs across various business areas. This unified approach aids consistency, efficiency and speed of delivery. Instead of each business unit having its own solution, firms can utilise a single platform for multiple business lines and asset classes. We continue to invest in and develop the platform to meet our clients’ needs and make their investment processes more seamless.

Tobias Windmeier: With the rapid pace of change driven by advancements such as AI, staying competitive demands maintaining a high level of technological sophistication. This means integrating AI and other technical solutions at every stage of the investment process. By doing so, firms can enhance efficiency, make more informed decisions and, ultimately, strive to be leaders in the asset management industry – regionally and globally.

The panellists’ responses to our questionnaire were made in a personal capacity, and the views expressed herein do not necessarily reflect or represent the views of their employing institutions.

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