Fund Management Software: Guide to selection, evaluation, capabilities & users

I've created this guide because it's a resource that I wish I had when I was on the buy side. Selecting Systems it's my hope that when you watch this video, you'll walk away with a few surprising possibly takeaways that you can take with you when selecting systems. Why Cost matters, but not in the way you thought it did why Workflow efficiency for end users is the most important thing to evaluate when comparing systems. How a different approach to connectivity and integrations can significantly increase the flexibility of your business and in the process reduce costs. It's not well defined what a fund management system or fund management software is. Beyond the fact that it's obviously software for fund management or fund managers. It can be any type of software for that purpose. So we're going to here cover all possible softwares that the fund manager might need across the front, middle and back office. So that could be anything from a all in one or front to back system where you have one system to cover all or most of the capabilities needed in the investment management workflow to the opposite of that which is a best of breed setup where you have one system for each small functional component and then areas in between where you don't have that extreme as in the best of breed scenario, you might have fewer systems but not one. We're going to cover all of those here. I'm Christopher Fuerst. I'm the CEO and co founder of Limina, a software company that services asset managers, asset owners and hedge funds. My background is from the front office and operations and bridging the two roles and I'm now in a very fortunate position where I've been on the buy side in your shoes and transitioned over to a software provider. So I know what it's like to be a client of systems. I know what it's like to compare and evaluate systems and select them and I can now give back the resources that I wish I had when I was in your shoes. Users include two different roles usually within the front office, portfolio manager or investment manager and trader or dealer. Those might actually be the same fiscal person for small investment managers or they can be different departments for any multiple departments of each. For larger investment managers, investment operations is usually also one or multiple teams. They are typically daily users. Even in the case when a work workflows are exception based as is the case with Limina, then they're still usually logged in on a daily basis. CTO and IT are usually stakeholders but not users, especially not for modern solutions that are cloud native. When the vendor like liminal, manages upgrades and maintenance of the systems, etc. Compliance or stakeholders, they are part of setting up compliance rules. But then once set up, they usually don't log in on a daily basis because notification driven. So they log in when needed, which hopefully doesn't happen a lot often. Similar with risk, they set up what kind of reports they need if risk is part of the solution and then they get those reports delivered and often aren't logging in and fiddling around in the system on a daily basis. There are three functional capabilities of a portfolio management system. The first one is monitoring portfolios that is in the form of a pivot table where you group on what you want and you select the columns that you want. Exposures, yield, duration, committed capital, etc. It could also be in the form of visualizations like dashboard widgets, etc. The second is simulating changes to portfolios. So what happens if we reallocate assets in a certain way, for example. And the third is actually making changes to the portfolio, so entering orders, rebalancing, having a leader follower, recalibration, etc. And limina is really really strong on all of these three. We have the best position in cash engine, which means which is an IBO generation free and that means you can simulate any change into the future, not just cash, but exposures. And you can see that on a very sophisticated and detailed level which is specifically useful if you invest in private market fund of funds or even if you have a discrepancy between the settlement days on listed instruments. It's worth also to note that the portfolio management system is usually a cross asset system, so all assets within the same solution. And the reason is that when you make these changes you're usually affecting cash. And it doesn't make sense to make changes to subpart of the portfolio without seeing cash, which is extremely important to keep often to keep low so you don't have a cash buffer but also not get an overdraft. Depending on the system landscape, the order management system has up to four functional capabilities within it. The first one is order raising workflows, entering orders, rebalancing against a model portfolio leader, follower setup, etc. Which is also functionality that is in scope for a portfolio management system. So there's an overlap between between those two systems there. The second one is connectivity to execution systems, EMSs to directly to brokers and to outsourced trading providers. The third one is pre trade compliance, which is very commonly part of an order management system, but could theoretically be a separate system and the fourth is transaction management, allocations, matching, even SSIs, sending trade files, etc. The uniqueness with LIMNA when it comes to the OMS is the efficiency of workflows. The goal of an execution management system is to help traders and dealers get the best price possible when they execute an order in the market. The EMS usually has very deep market data connectivity, usually have very specialized workflows depending on asset class, IOIs, etc. Can have direct market connectivity DMA and is built to be very efficient and nimble to use. A lot of EMSs to achieve this are specialized in one or a few asset classes. Pre trade compliance and intraday checks on price movements, etc. Are actionable for your investment team. If you have breach, you can make changes and you can actually remedy the breach in one way or another while the post trade check that is being done sometimes, most often actually at nav time cutoff is used to prove compliance, but you can't really do anything about it. So if you have a post trade breach when it's time to set the nav, then it's not actionable, you can't do anything to help the situation, you're breached and that's it. So that's more a proof mechanism. While the pre trade compliance and intraday checks are actionable for your investment team to do something about. To that end, it's very important that pre trade and intraday checks are built into workflows in an efficient way for the portfolio managers. One additional thing to note is that the way that compliance rules are configured within systems differs greatly between different systems. So in some systems it is hard coded which rules are possible so the provider would have to code each possible rule. And in other systems like Limina, there are rule builders available where you can configure your own rules, which means that rules are much faster to set up and maintain. You're not depending on us as a vendor, and you can set up virtually any type of rule that you want yourself in minutes. Risk covers scenario and stress testing scenarios being simulating what happens with a portfolio if for example the Vix index changes, interest rates increase, etc. Either in isolation or in correlation with each other. Scenarios are what would happen to my portfolio in a historical actual scenario like the Lehman crash, the COVID pandemic, etc. The main difference is that the stress tests are hypothetical scenarios while the scenarios are actual historical scenarios being run on your portfolios. Performance attribution is comparing the returns of the portfolio against the benchmark. It could be on any type of segment, like a sector, geography, etc. The different models to do this, one of the most common is the Brinson Fackler model. There are also different ways to actually calculate these numbers. There are approximations that some systems do, or there are the actual true correct calculations, which is time weighted returns, taking subscriptions into account in the correct way, and doing daily calculations, which is the approach that LIMNA is taking. There are four areas that are usually covered within a system for operations. The first one is trade matching, an affirmation which is typically overlapping either with an order management system or it's part of a middle back office system, sometimes even two if those are separate systems. The second is cash management, position lifecycle, corporate actions, etc. The third one is NAV, shadow NAV and reconciliations. And reconciliations is typically three, sorry, six different areas, starting with transactions, then corporate actions, positions, cash, P and L&NAN, and usually in that order. So that if you catch something that affects cache in the first three, then if you then find an issue in the cache reconciliation, you know that it's not one of the three previous ones that are causing that issue. The last two are optional, not all managers will perform them. And the fourth is a operations hub, which is a center to keep track of all recurring tasks and processes, which is not something that is usually part of the system like this. And LIMINA is unique in that it has those built in and connected with the workflows that your operations team performs. Investment data management has four functional capabilities within it. The first one is reporting, so getting data out that could be into BI tools, spreadsheet, client reports, other systems, data warehouses, et cetera. It could be in different ways. It could be through APIs, it could be report builders, et cetera. Within Lumina, we have both of those and the report builder is extremely intuitive and robust to use. The second part of an investment data management system or scope is automated data controls. So for example price checks, large price movements, missing quotes, and instrument parameter checks. So we might have a custom ESD classification that we want to be set on specific instruments. So then having the system check that it's being set and send warnings and notifications. If not, the third is being able to extend the data models. So for example, extend the instrument data model with custom classifications like for example ESG classifications. The third is strong connectivity in general, so making sure that it's as easy as possible to get data in or out of the system. In most cases, investment data management is going to be either a separate system or not exist. Because most systems that are even a front to back system, separate oms, whatever it might be, usually don't have strong data management capabilities built into them, which is something that Lumina. Thus we are an investment data management solution as well as have all of the other functional capabilities across front, middle and part of back office with NAT reconciliation, etc. There's a clear trend in the market towards all in one solutions or front to back solutions or at least front to mid solutions away from best of breed. The reason being it simplifies the operating model you don't have and multiple licenses to pay. You pay for one system instead of multiple integration headaches and costs are taken away. And what resides in these systems, the functional capabilities of these systems. It's not the secret sauce of an investment manager. These are things that are required to do from an operational point of view and from an investment process point of view. But it's not. The investment decisions aren't part of this system. So it just makes sense to streamline and increase efficiency which happens if you move towards the all in one away from best of breed. However, that's not the only question that drives efficiency here. There are other considerations as well. The core of any system is the engine that calculates position and cash. Any system that has position and cash in it has an engine that calculates positions and cash. And that is called an investment book of record. And there are three types of investment book of record. Number one is called the flush and fill, which isn't even really a book of record. It basically takes the positions and cash in the morning, start of day positions and cash from an accounting system or another provider and then makes adjustments intraday and then throws it away. So it's incredibly hard to do projections into the future and things like that because what has been adjusted, what hasn't, et cetera. The second generation is called the rolling balance. It takes yesterday's nav and applies today's changes on top of it. So it sort of can stand on its own feet. It's not depending on a start of day load from another system system. However, it still is reliant and on this it's just one time series, it's still making adjustments, etc. Third one is called a live extract IBOR and it creates the positioning cache view on the fly from all records that affect position and cache, historically, today and into the future. And having a system with a third generation IBOR means that you can very easily simulate any changes into the future. You can have portfolio managers front Office team members that are simulating things, even planning things that are weeks or months out. That doesn't affect reconciliations and other operational processes at all. They're sort of completely separated within the system. Limni is a third generation ibor and all functional capabilities in the system leverages that engine and it can be managed internally or be fed from external middle and back office outsourcing providers. It doesn't matter, both are possible and the full value value of that engine is delivered to the front office. Workflow efficiency is probably the most important consideration when selecting a system, and this isn't caught in any functional mapping. So if you look at feature lists, do you have this yes, no type of questions, you're not going to catch the efficiency of the workflows. At limna, we've seen up to actually a little bit more than 50% of the entire time that the operations team is spending on their workflows being saved by changing to our system. That's not a one off. We have multiple other examples with the same ballpark number. So the difference between one system and another can be at least 2x on the staffing requirement side, which then is even more than the cost of the system. So it's a massive difference in these two. On the portfolio manager side, the average portfolio manager when they go in to perform a workflow in Limina is actually less than 15 minutes per day, which is incredibly low compared to more than an hour in alternative systems. Which is because the way that we approach efficiency in workflows, making sure that portfolio manager sees only what they need at the time they need it, and can perform workflows efficiently in the system, not relying on spreadsheets, even sophisticated workflows. And for operations, having exception based workflows basically means that tasks are performed by the system. Anything that resides on a calendar or can be described check that is performed by the system, one or multiple in the process. And then if something happens that is unexpected, which does happen a lot in our industry, exceptions are common. Then those exceptions are raised to operations team members who can go in and remedy the situation. Another important consideration when selecting a system is the ease of getting data in or out of the system. Most systems have what's called managed connectivity, which is when the vendor builds a connection and manages that on your behalf, which is a model that works very well for connectivity to execution systems, to brokers and to market data providers, for example, but it works less well for connectivity to reporting platforms from custodians and for example administrators. Liminal has taken a different Approach here we have developed an import and export application which is a configurable user configurable tool that requires no code and no technical expertise where users can build and maintain their own connections within minutes very easily in the system. And these connections are then monitored through dashboards and notifications. If something goes wrong, data is validated that is going in or coming out and for example if a file is delayed, you get that notification or you can see it in a dashboard immediately. System needs to be cross asset because cash is central. So if you have a portfolio with more than one asset class, then both of those asset classes or multiple asset classes, how many, however many it is, needs to be supported within that main system because they will share the cash. So something you do on the equity side will affect cash, fixed income side will affect cash, derivatives, FX, private assets, etc. It will all affect cash and that is central. So to be able to have a control of cash, keep it low, minimize cash buffer and not get an overdraft, you need a consolidation of all asset classes into one system. It's important to consider buying a modern solution that has no IT footprint and no upgrades that you need to manage or test as a client. So cloud native solution with managed updates and regardless of your size, if you're a small hedge fund with 100 million in assets, or if you're a large international asset manager with tens or hundreds of billions, there are solutions cloud native available to support you. And the other part that's important of a modern solution is the user experience and user interface. We asked potential clients and end users to rate how intuitive and how easy do you think the Limna system would be to to use? When you've seen demos and based on your experience with other systems and the rating we got was not terrible, people guessed five on average, a little bit more out of 10. And when we then measured actual clients, exactly the same questions. When the users have been using the system for a while, the answer we got was 8.8 on average out of 10. So the difference there is massive. And I think it's a good idea to ask your potential providers if they can share these ratings. They might not have the comparison before after usage, but at least they should be able to provide the satisfaction score of end users that are using the system. It's incredibly important to choose a system with costs that you understand control. So no hidden fees. And also where there are no unnecessary fees and by unnecessary fees definitely mean it related maintenance upgrades, there are other potentially unnecessary fees like fees for integrating to Custodian or fund administrator, because those types of integrations should be very straightforward and even configurable within the system, which is the case of Limina, so you don't incur any fees for those integrations. Another important consideration when it comes to pricing is to choose a vendor that is transparent with their pricing, ideally even publishing it on the website. And the reason why is that you want to know what the system costs before you spend time with the sales team, because you might not even know if this is in the ballpark of your budget and things like this. The vendor knows what their system costs, so why would they not tell you? So the providers that do, it's a clear signal that they value a partnership with you as a client. They put your needs, your wishes ahead of their own concerns or around competitive intel and things like this that comes with the fears of publishing prices on their website. Limit pricing is available online. You can go through, you can go to our website and you'll find the pricing link which shows actual numbers. You can even get your own pricing quote there. One of the most difficult questions I get is what is limited? And the way I usually answer it is it is a all in one or front to nav solution. Functional coverage is very broad combined with automation capabilities. This is delivered on top of a generation free investment book of record or a live extract book of record. So you can simulate position and cash into the future, current and historical. And finally, it's a system with incredibly strong user experience and super efficient workflows powered by exception based workflows. Before using Limina, clients have manual processes. Some that they might not even be aware are possible to remove. They might not even think about them as manual processes managing data in Excel, for example. They are sometimes unsure if they can trust the data that they see. Again, they might not even know that, but they realize afterwards that all right, I couldn't see these states in the front office, these simulations, these future scenarios on the portfolio. They found it sometimes difficult to scale and they had high key person risk, which again they might not even appreciate before the exception based workflows come into play. After limina, automation level is very high. Again powered by exception based workflows. The source of truth is one single source of truth. So even if Lumina doesn't generate all non trading activities, for example, we represent all of them and we give them to the front office users and operations to check and control. They have a very scalable model operating model in place that can scale to any asset class, any size of manager, up and down. And finally, key person risk is significantly reduced through the exception based workflows and the operations hub where all processes are centrally controlled and monitored. Hopefully you've now got a deeper understanding of the nuances when selecting a system, and that features isn't everything, although there is a clear trend towards all in one systems. The other important consideration is exception based workflows or the efficiency of workflows, which is often more impactful to your efficiency and your cost than the functional coverage of a system. If you have enjoyed this video, please subscribe to my YouTube channel where you get notified when I put out new videos. I'm active almost Every day on LinkedIn where I share information around operational efficiency, operating models, vendor selections, etc. Feel free to connect with me there or follow me. Thanks a lot for watching.