Commentary: For fund managers, data warehouses and dashboards are suddenly cool again

As global markets brace for the potential end to a decade of non-stop economic growth, private fund managers are making extraordinary moves to strengthen relationships with limited partners and enhance investment performance.

Fifty-five percent of fund managers at regulated funds are now advancing a data management initiative aimed at improving operations, according to the Investment Company Institute and Accenture. The same report cited 42% having a back- or middle-office consolidation or conversion initiative underway. This in turn is putting pressure on internal and third-party fund administrators that have to do more with smaller fees.

Some of this is in response to funds customizing portfolios to suit institutional investors, while others are creating digital portals for advisers to more easily model investments, and disruptors are popping up to open more financial opportunities to individual investors.

Beneath all of these changes is one crucial factor: the agility and power of data systems. Funds that are able to collect, analyze, rapidly disseminate and gain insight from data will open the way for innovation and digital differentiation. The funds able to adopt and adapt early will be the ones that survive the current and coming evolutionary forces.

Ultimately, it's data transparency that may empower fund managers to answer the question that all limited partners are asking: Are you smart, or lucky? In that way, data operations may not make for better investment performance, but it may allow better investment performance to be discernible.

The mystery behind hedge funds and their former opacity has lost its aura. It's not enough to show strong financial returns. Limited partners want to look under the hood. They are looking to differentiate their own portfolios with smart strategies and data-based diligence of managers.

General partners need to have data systems that can produce the insights and transparency that convinces these LPs that their projections are for real, and that the past decade of performance wasn't a stroke of luck in a bull market.

Unlike fintech startups, however, established funds don't have the luxury or experience to build new systems from scratch. Fund executives are often saddled with legacy systems that are impossible to replace, but hopelessly out of date.

Recognizing the threat of digital disruption, these executives have to do something. But often they are still choosing to make incremental changes to their existing processes, rather than seeking out solutions and domain-based tech-savvy partners that could dramatically enhance their data capabilities.

There remains a belief among many fund managers that an incremental approach is playing it safe. However, forward-thinking managers see the long-term risk of deficient data systems and realize that many of the changes once seen as risky are an increasingly safe bet.

Data warehouses, for example, are not a new idea in the fund management space. Yet, many managers that invested in data lakes over the past decade didn't see the return on investment they were hoping for. It turned out that human resources previously deployed to manage decentralized data systems built around the general ledger were often redeployed to verify and manage the information moving in and out of these new data warehouses.

Developments in machine learning have changed the rules of the game. Rather than shifting accountants and data scientists from one tedious job to another, managers can now train bots to do the menial work of disseminating and verifying data and focus on the higher-value job of turning data into investment insight.

Data-savvy managers are already integrating advanced analytics and machine learning in their market analysis and due diligence, assigning bots to observe the decision-making process of their investor teams and then looking for similar patterns elsewhere in the market.

There is a parallel trend of managers engaging LPs in the decision-making process and creating investment products and services that create a more personalized experience. Creating investor portals and self-service channels is impossible without data systems that can rapidly collect, compile and verify investment information.

Yet, there remains a belief among some fund executives that market smarts alone will win the day — that technology can be replicated, while experience and instincts cannot. That's not entirely inaccurate. Human decision-making and governance will continue to be a key driver of success.

How will this impact fees? At first glance, the push to more efficient data operations is in response, in part, to flat and declining fees, with exchange-traded funds leading the way. But data transparency, made possible by stronger data operations, can also allow data to be served up that can legitimize and support sensible fees. If a fund manager can show they're good, not lucky, investors can feel more comfortable that they are more likely to earn a premium over a no-fee alternative vehicle.

Digital disruption happens fast, and the asset management industry isn't immune from it, regardless of the reputation of a fund or its managers. It's unclear exactly how digital disruptors will reshape the industry, but managers need to have systems that can adapt.

Many Frankensteins are unknowingly being created, trying stitch together the old and the new, and we are nearing the point at which incremental upgrades to outdated systems will no longer be enough to deliver on the basic expectations of LPs. And we are well past the point at which investing in an overhaul to data systems is risky. The real risk not being prepared for the demands of data-driven investors.

Kevin Walkup is president and chief operating officer of San Jose-based fund data operations company Harmonate. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.