ASPs: new hope or false promise?

Eighteen months ago, ASPs were hailed as the next big thing for corporate and asset management end-users. Dozens of internet platform products were launched but many of those have since shut. Why haven’t end-users embraced ASPs? By Gallagher Polyn

At the height of the dotcom bubble in 2000, risk analytics vendors offered a raft of internet-based buy-side systems. Both established vendors and dotcom start-ups promised cheap and easy risk management analytics for the buy side. They argued that the application service provider (ASP) model allowed the operational burdens of supporting risk technology and expertise in risk analytics to be outsourced, lowering costs and allowing small shops to focus on their core businesses. Risk measurement and reporting would be as easy to obtain as clicking open an internet browser.

Unfortunately, it wasn’t that simple. Ravi Jain, chief executive officer and co-founder of Egar Technology, a trading and risk technology company based in New York, says small asset managers and hedge funds were hesitant to reveal their position data to anyone, and he says potential users were frustrated by limited functionality. “There was additional risk being introduced, the flexibility wasn’t there and it was expensive,” says Jain. “It was a very difficult sell back then.”

Despite advances in technology, it’s still a difficult sell, especially to the important hedge fund market. “Most of the systems came out of the sell side, and their primary market is still the sophisticated fixed-income and derivatives groups,” says Richard Horwitz, who is currently hunting for a new risk management system for Kenmar Global Investment, a $1.1 billion fund of funds in Greenwich, Connecticut, where he is head of risk management and investment analytics. A majority of hedge funds are equity-only, and the online risk services are not penetrating that group particularly well, he says. Also, prices are still high, he says. One online risk vendor, which Horwitz declined to name, has doubled its prices in the past year.

Though actual failures of online risk ventures have been few – JP Morgan’s Cygnifi aimed at derivatives dealers folded in October 2001 – rumours abound about the next risk dotcom venture to go under. Users feel the chill and are taking care to sign up only with those vendors that have obvious staying power. “A strong financial backing was important to us, because we knew there were a lot of vendors out there – we wanted to make sure they’d be around a few years out,” says Valter Viola, head of research and risk management at the Canada Pension Plan Investment Board in Toronto. Viola signed up for State Street’s Askari TruView ASP service this past winter.

But vendors are now preparing a new generation of online risk services that they say will take better aim at medium-sized and smaller asset managers, hedge funds and institutional investors. The new services will allow users greater customisation of risk reports. Barra, for example, hired a team of perceptual psychologists to aid in the design of risk report screens for its forthcoming BarraOne product. Across the board, vendors are deepening their products’ ability to provide portfolio scenario and stress testing. Finally, vendors are moving away from overnight batch processing of risk reports to providing even intra-day reports. During unexpected market events, fast reporting is important not only to traders but also to nervous investors, who want to know how much of their money is at risk in a suddenly changed market. These changes should finally allow online risk management to live up to the ASP billing: a virtual application essentially the same to a user as if it were installed and running on a local computer.

Some of these systems are already on the market. RiskServer, a market risk product from New York-based RiskMetrics, calculates Monte Carlo, parametric and historical value-at-risk, and performs stress tests and portfolio risk decomposition for all major asset classes and their derivatives. Part of RiskServer’s appeal is the brand. “RiskMetrics has become a bit of a standard, so our investors feel comfortable knowing we’ve incorporated it into our own risk systems,” says Chris Gaughan, president of Big Sky Capital, a $200 million macro hedge fund in Los Angeles. The fund licensed RiskServer four months ago.

RiskMetrics says 35 other firms use RiskServer. The service was developed to try to achieve RiskMetrics’ objective of offering product trials to potential customers online, two years ago. Gregg Berman, head of market risk at RiskMetrics, estimates that only about 30% of RiskServer users came to the product because they wanted an ASP risk solution as such, while many other customers simply found the online demonstration satisfactory and opted to receive service that way.

An important development, according to Berman and other vendors, has been a sea change in financial institutions’ perception of data security and reliability. “The idea of outsourcing the implementation of a risk system has become much more accepted,” says Eric Reichenberg, Askari’s chief operating officer. “People have just come to recognise that these things are real and that they are viable.”

Crucial role
Data management is crucial for those with in-house risk systems. And managing it can be a hassle for smaller buy-side firms. The prospect of spending significant sums and hiring dedicated staff to manage the data for installed risk management software was an important factor for David Guy at J&W Seligman & Company, a $24 billion investment management firm in New York. He decided to go with Deutsche Bank’s online risk service – db RiskOffice – in late 2000. Guy is head of the discipline investment group at the company, which manages $3 billion. “I would have had to go and fetch all the indexes in the world, all the equity models in the world for equity, international, domestic for fixed income, international and domestic, all the currencies in the world,” Guy says. These problems were avoided, he says, by going with db RiskOffice.

Soon, even data management for risk will be possible to obtain online. In the autumn, Asset Control, based in Beetsterzwaag, the Netherlands, expects to launch a data management outsourcing service online, called Acdex. The actual extent of savings through using the new solution is difficult to estimate due to the widely varying data needs of different buy-side firms.

Risk systems vendor Barra, based in Berkeley, California, will be releasing its new ASP, BarraOne, in the autumn. This is a multi-asset class portfolio risk management tool covering equities, bonds, derivatives and cash. It has been in development for two years and is aimed at small asset managers, institutional investors, hedge funds and hedge fund distributors that have been outside Barra’s traditional customer set. Several buy-side firms are currently testing BarraOne in-house, though the company declines to name them. The application features deep report customisation and offers ‘what-if’ scenario analysis, which allows users to model prospective changes to their portfolio.

Toronto-based Algorithmics, which has licensed its risk calculation engine RiskWatch to banks and online risk vendor Measurisk, unveiled its new ASP strategy in January, when it announced a partnership with Bloomberg to supply all its risk analytics to Bloomberg’s trade order management system customers. The alliance is considered a win for Algorithmics, which has lacked a strong presence among small buy-side firms. According to the current timetable, the market risk service for Group of Seven government and corporate bonds, agencies, equities and municipals, will go live in November. Credit risk and collateral management functions could be added by the third quarter. Derivatives instrument coverage for many trading jurisdictions will be complete by the end of 2003. Algorithmics’ head of global sales for the alliance, Jason Nabi, based in London, says that by the end of 2003, he expects around 50% of Bloomberg’s current 700 trade-order management system users, plus 200 new users, to use Algorithmics services on Bloomberg.

SunGard Trading and Risk Systems introduced a version of Panorama, its widely used banking and buy-side risk management product, last year. Panorama ASP has no users yet, but that doesn’t worry Gavin Lavelle, a president at SunGard Trading and Risk Systems in London. That’s because the cost of deploying Panorama for SunGard is minimal due to the huge remote hosting facilities the firm maintains for its technology disaster recovery business. When Panorama ASP customers arrive, this remote-hosting capability will save Panorama ASP’s users money, says Lavelle. “From a pricing perspective, we can be ultra-competitive,” he says. “We’re seeing the technology running ahead of the clients being prepared to make that shift to outsource their risk technology,” he adds.

Competition
Deborah Williams, co-founder and head of risk management at financial technology advisory firm Meridien Research in Newton, Massachusetts, has argued that risk system vendors will eventually find competition from banks offering low-cost or free risk management services online to their customer base. In March 2000, for example, Credit Suisse First Boston implemented Algorithmics’ RiskWatch risk engine to drive online risk management services for prime brokerage clients. But Egar Technology’s Jain says the implementation of technology such as RiskWatch is technically formidable at any institution, even an investment bank, and this has perhaps inhibited faster growth of such offerings by banks.

Still, bank-owned online risk services chug along. Deutsche Bank’s db RiskOffice, which opened in 1995, calculates VAR and tracking error on the basis of e-mailed user data and sends back reports. Some reports, such as the results of stress testing or hypothetical position-taking analyses, can be returned intra-day.

db RiskOffice head, Michelle McCarthy, claims the service specialises in capturing the gamma profile of option strategies and convexity in fixed-income strategies. Though it is not a true ASP, McCarthy doesn’t rule out such development in the future.

Three-quarters of the customer pipeline for State Street’s Askari system is for its TruView ASP system, according to Askari’s Reichenberg. There are now six active users of the service – a mix of plan sponsors, prime brokers and investment managers. “Many clients have a compelling need to have a risk management application online in a relatively short time,” says Reichenberg. “We can usually get a client live in a few weeks or even less,” he adds. A new version to be released in winter 2003 will add more asset allocation decision-making tools, interactive capability to do risk budgeting, what-if analysis, and risk and performance attribution on a consistent basis.

Meridien’s Williams says more offerings will be arriving in the autumn, but vendors are keeping them quiet for now. So, should firms wait 12 months for the arrival of the new wave of risk ASPs before making any decision to upgrade their risk management systems? “If they have a situation where they can either muddle through based on a current ASP offering… or they have a system in-house that they’re looking to replace… it’s useful to be aware that there’s more coming,” says Meridien’s Williams. “If you’re not happy with what you see in the market today, I wouldn’t necessarily feel like you had to choose something that was out there.”