Alpha. Investors want it, and asset managers build and execute strategies to achieve it. But once it’s earned, how can it be preserved? The answer is more important than ever as the expense and complexity of regulatory compliance continue to increase, hand-in-hand with investor demand for transparency and expectations that managers will hold steady or even reduce fees. At the same time, the cost to managers to achieve their remit inches ever upward, directed toward more and better technology, and the people to use it.
“Achieving alpha is driven by executing investment strategies a manager believes present the best opportunity to do so,” says Ryan Burns, Head of Global Fund Services Americas, Northern Trust. “Alpha preservation is the other side of the coin. Outsourcing brokerage and trading responsibilities gives managers the opportunity to ensure that burdensome costs associated with trade execution and regulatory compliance are not taking away from the alpha they’ve generated through their investment strategy.”
One way to preserve alpha may be by achieving operational alpha® – made possible with a seamless, flexible, less worrisome operating infrastructure that allows day-to-day functions to proceed on behalf of an investment strategy, and with an alpha mindset. And it’s all outsourced, presenting managers with desperately needed cost efficiencies and opening up new avenues toward investment return alpha.
“From an operational perspective, when things are running smoother, it enables a manager to move forward with additional distribution channels, or complete fulfillment of an investment strategy without having to infuse capital into the operating environment or into adding bodies to support a new market,” says Burns. “Operational alpha that can be generated through leveraging an outsource solution can really create broader opportunity for managers to focus on their core strength, which is pure investment alpha.”
Potential advantage for early adopters
Asset managers are hardly strangers to outsourcing. Fund administration and accounting have been outsourced for a few decades, and it’s fairly routine to hire out the task of establishing the net asset value of a fund, for example. Middle office functions have been increasingly outsourced for the past 10 years or so as well, but the front office – brokerage execution – is still new outsourcing territory for many asset managers, and the potential benefits in exploring it are plentiful.
Many of these upsides become immediately clear when viewed in the context of global strategies that are executing trades around the clock. An asset manager might have a handful of traders in, say, two or three time zones, who are attempting to cover everything, everywhere – and likely at “off” times for certain markets. Northern Trust has service and execution locations in North America, EMEA, and Asia Pacific – that is, boots on the ground adjusting trade execution to the ebb and flow of any given day whatever time and wherever it’s happening.
“Our infrastructure allows us to have people that are executing as close to a market as possible, and that definitely helps with the level of transparency and consistency of execution in global markets,” says Burns. “That’s important not just from the execution perspective, but also as it relates to the consistency of the product, where you’ve got people working different hours of the day, providing redundancy, support, and backup. Transparency and best execution are partners, and we have the bigger picture view of trading across different jurisdictions and security transactions; at the same time, we’re assessing the control environment and enabling oversight. Ultimately, we provide information to managers in a format that is both reusable and supports their broader regulatory need. Our data allows them to show how trades were executed, and why they believe that to be best execution.”
This level of transparency, clarity, and flexibility of data delivery that can be combined with the manager’s existing data without redoing or massaging it is a hallmark of Northern Trust’s post-execution solutions. All of the processes and data in trading are interconnected – none operate in a vacuum. When all is said and done, asset managers are still responsible for presenting all data in a complete and holistic way to investors and regulators who demand it.
“Managers must be comfortable and have unobstructed visibility into what is being done on their behalf,” says Burns. “The investment in the post-trade data position, via all the different distribution channels, really helps underscore the benefits of an outsourcing relationship with a partner such as Northern Trust. When you can automate the data process, and enhance it with a broader analytics program, that’s a critical aspect of deciding whether or not to outsource, and how it can impact the investment decision-making process itself.”
