Hedge funds and more traditional asset managers are exhibiting an increased appetite for portfolio management systems that can handle OTC derivatives trading, according to a study by Aite Group.
The 54-page report is based on reviewing 22 vendors with 31 portfolio systems and on direct interviews with buy side institutions. Collectively, vendors have seen an “uptick” in traditional asset managers using their solutions. Five years ago, the split between hedge funds and asset managers using OTCD portfolio management systems was 75 percent hedge funds/25 percent, while today it’s closer to 58 percent asset managers/42percent hedge funds.
The report, “Multi-Asset Class Portfolio Systems: The Beat Goes On,” which is the first in a series of new research, found that vendors are providing core infrastructure for investment firms and are evolving with changes in market regulation.
According to the report, the global portfolio systems market is valued at $3.3 billion in spending. By comparison, the OTC derivatives (OTCD)-intensive portfolio systems serving the buy side market generated $1.28 billion in 2013. Aite expects this segment to grow to $1.41 billion by 2017 at an annual average growth rate of 2.5 percent.
With the boom in hedge funds from 2003-2007, investment firms using derivatives to boost returns began demanding a new breed of solution, with requirements for advanced risk analytics and valuation modeling. Initially, a group of portfolio system vendors with strong OTCD capabilities and the required advanced risk analytics and valuation modeling crossed over from the sell-side of the industry.
“These cross-over vendors from the non-buy-side community have transformed into core infrastructure providers,” stated Denise Valentine, senior analyst in Institutional Securities & Investments at Aite Group, in the release unveiling the report.
Vendors that are strong in OTC derivatives, risk analytics and valuation modeling are profiled in the report, including Calypso Technology, Derivation Software, Imagine Software, Misys, Murex, Open Link, Paladyne, SimCorp and SunGard Data Systems. Additionally, Aite covers middle-to-back office systems hat have OTCD accounting capabilities and are included in the size of the market.
Three of the nine vendors in the report — Imagine Software, Paladyne and SunGard’s Hedge 360 — are hosted application deployments. However cloud deployments are not growing so much on the buy side, with vendors say that buy side adoption of cloud deployments is around 5 percent. While all the vendors offer the hosted implementation, only Murex has seen a significant uptick with new client on-boarding to cloud over the last 12 months running at 10 percent, notes the report.
Other vendor products that are on the horizon include Liquid Holdings, a publicly traded firm that targets hedge funds with a cloud-based solution that provides trading, compliance, real-time advanced risk analytics, and reporting.
While OTCD vendors have invested in enhancements to support risk, they are focusing on other capabilities such as interactive dashboards that allow users to facilitate views into the data on their systems. Some are speeding up their systems’ performance given that clients need to collect and derive data that is growing exponentially, and also to store and retrieve data for regulatory reporting. The “regulatory wave” is prompting some OTCD vendors to add connectivity to central clearing counterparties and enhance their systems for collateral management, the report notes.
Though some investment firms use plain vanilla strategies and don’t require sophisticated multi-asset class solutions, as the conversation about structural changes to the OTC derivatives markets continues, Aite expects that some previously unlisted instruments will find a broader audience. Aite also predicts that the competitive landscape for OTCD-intensive portfolio management and accounting systems could grow. Some of the newer entrants to the 2013 report (since the original report was published in 2010) include Paladyne, which launched a risk management capability in 2013 and Derivation, a UK-based company that is turning its marketing efforts toward the US.