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Operational Quality : An Overlooked Metric
- Operational quality (ie, execution) is a significant contributor to investment performance, since shortfalls will arise if the investment manager's operations cannot deliver the value inherent in their strategy
- Asset selection and allocation (ie, skill) are contributing factors, but they alone cannot explain the variability encountered within peer groups
- Our research using product and operations data compiled from 1999-2006 shows that optimal investment operations can deliver sustainable improvements ranging from 50-250 basis points in risk-adjusted performance
A Quantitative Approach to Operational Quality
- Our key insight embedded in RiskForecast™ is the relationship between information latency and portfolio implementation shortfalls. Our proprietary database enables you to correlate information latency with the optimal remediation options and generate a probabilistic view of the outcome in basis points
- Information latency is the inability of people and systems to simultaneously deliver and act on information in a timely manner. The underlying cause of information latency is the effort (both systematic and human) to reliably map and transform the syntax and business meanings of the various transactions that flow within the firm and with its counterparties
- Given the dynamic nature of markets and the fleeting nature of opportunities, information latency significantly constrains the ability of an investment manager to deliver the alpha implied in the underlying ideas
Robust Implementation
- MINIMALLY INVASIVE : RiskForecast uses transactional and reference data drawn fom existing sources in the investment manager's operations. Our proprietary analytics then examine the components of these transactions that contribute to information latency. For example, a commonly observed source is the multiplicity of data used to derive a risk factor. In many instances, one of the information sources has poorly indexed data that requires an offline data scrub thereby delaying the overall production of the target portfolio by the optimizer
- EXPLANATORY POWER : RiskForecast generates reports that (a) ranks the causative factors that contribute to information latency and suggests actionable approaches for resolving these issues; (b) discloses the specific sources of information latency (at the data element level) from the various transaction fragments examined; (c) enables access to the underlying factors in a form amenable for ready inclusion in quantitative risk models
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