Timothée Raymond, head of innovation and technology at Linedata, speaks to Lucy Carter to elaborate on the company’s Linedata’s Global Asset Management report.
He outlines what its findings could mean for the industry
Linedata’s Global Asset Management report is conducted once every two years, and considers the most pressing issues that asset managers are facing, the latest updates and trends and how these manifest across different geographies and areas of business.
The 11th iteration of the report was conducted in Q1 and published in June 2023, with the participation of 265 senior decision makers across Europe, North America and APAC. Opinions were gathered from a wide range of industry sectors; asset managers, hedge funds, wealth managers, pension funds, private equity, sovereign wealth and private credit managers, and multi-family offices all contributed to the study.
Automation, digital assets and, somewhat inevitably, ESG are all considered in the paper — however not necessarily in the ways you might expect.
Managing the data
Linedata’s report confirms that data management efficiency remains an issue for the industry, with firms struggling to consolidate data across systems. Across all regions, the primary operational challenge that firms are facing was said to be ‘supporting the investment process with best-in-class data and tools’, while concerns about data integration across systems have jumped from the seventh to third most challenging issue around data management since 2021’s report.
“This is a complex problem, because it could be seen as a data fragmentation problem, or as a systems fragmentation problem,” Raymond says. The bulk of the issue comes from data sources outside of organisations being scattered across different suppliers, he explains, but adds that their internal systems are built that way too.
“They have something for compliance, so they need the market data for compliance. They have something for front-office processing, so they need market data and maybe intraday data for that.” As a result, firms are often paying for the same data multiple times for different systems because they don’t know how to cross-leverage it; “they definitely need to do something for improved efficiency and cost.”
While system consolidation is often an ideal strategy, he admits sometimes it is simply impossible. In order to move forwards internally, “there needs to be a seamless connection between all the older systems,” Raymond affirms. “Not clumsy, flat-file exchanges — they need to be operating in real-time, or close to real-time, using APIs.”
Externally, “it’s important for firms to look at some of the offers that are on the market. We have a data hub that takes sources from multiple vendors, and sometimes enriches the data with the company’s internal sources, using cloud-based software.” Once the data has been aggregated, it’s fed into an organisation’s systems “with exactly the same data structure and exactly the same keys to identify the records.”
This makes the data management problem something external to the company, Raymond explains, “and makes the data ‘nicer’ before it’s injected into a company’s system.” Streamlining systems, how they communicate with each other, ensuring that the data being inputted is clean and already reconciled with them, are essential steps to take, he adds.
Investing in efficiency
In the short-term, Linedata’s report states that firms’ technology priorities are around gaining an investment edge and enhancing efficiency. Cybersecurity and automation are also highlighted as high on budget agendas. Over the next five years, “infrastructure resilience, cloud and the way that firms actually operate their solutions” are where investments need to be focused, Raymond suggests. He references a recent Amazon Web Systems outage on the US east coast, and the impact that this had on a number of Linedata clients. This highlighted the importance of building resilience; “these companies didn’t design their systems in a way that they could stay up during such an outage,” something that can be extremely detrimental to operations.
A second point of focus is internal software, including architecture hosting, security and workflow efficiency. AI and automation, of course, are also at the top of the list. “These are both broad terms, but firms making sure that they use these technologies to bring efficiency gains, particularly to middle- and back-office jobs, is critical,” Raymond affirms.
“Automation is just robotics, there’s no intelligence in there. What we’re doing with AI, bringing reasoning to tasks, will definitely change the game.” While it’s currently being used to advise on decisions, Raymond predicts that AI will “absolutely” be used to execute decision-making tasks later down the line. “Every month, every year, we go higher up the chain,” he says, in reference to the complexity of tasks AI is being trusted with.
AI ahead
In regard to which region is most enthusiastically embracing AI, Linedata’s survey reaffirms APAC as the frontrunner.
“I wouldn’t say APAC firms invest more, but they have more success. They implement faster,” Raymond comments. “In Europe driving change is a long and potentially tedious process. You have to talk to a lot of people before getting anything approved.” In APAC, however, “regulation and company culture allows firms to make more aggressive changes. If something is decided, then firms just change what needs to be changed.”
Although it may seem that AI is all anyone in the industry is talking about, there is a surprising lack of investment into the technology. “Some people in the middle and back offices believe that nothing can replace the judgement of a person, and other organisations just don’t want to put their money into AI,” he explains. Additionally, many firms are still reliant on manual processes, even using paper in their operations. “We have a lot to do,” Raymond affirms.
“The scale that AI gives us is forcing us to change,” he continues.
“In the past, you could throw people at problems, multiply the number of people screening transactions, for example.” Now, however, “the scale is too big. The acceleration of organisations in the coming years will require another solution, and AI provides that.”
Over the next few years, the key areas of development in the AI space will be, of course, around generative AI and large language models. While the models that Linedata “has been using for five or six years” can multiply its ability to solve clients’ problems, recent innovations “have made AI completely different than it was six months ago,” Raymond enthuses.
The main challenge facing the industry here is “making this technology private enough for financial institutions to use it,” something which is being heavily invested in. “We’re going through a very interesting change right now,” he comments.
In the clouds
Linedata’s report states that cloud adoption has risen by more than a quarter since 2021, with 86 per cent of asset managers currently saying they are using cloud platforms. This is a more than 25 per cent increase from 2021, and refutes the results of the 2019 study in which more than half of asset managers stated they would not transition to the cloud.
There is also a shift towards the use of public or hybrid cloud models, as the industry begins to move away from private data centres. “We are definitely migrating a lot of clients on the public cloud,” Raymond reports, emphasising the convenience of the strategy for executing disaster recovery or going into a new region without having a huge footprint. Considering whether public cloud will entirely replace private cloud in the future, Raymond states that “change is happening, there’s no doubt about that, but I don’t think there will be a complete replacement.”
While the public cloud offers benefits of scalability and flexibility, and boasts attractive cost savings for firms, Raymond adds that these are not necessarily needed in all organisations. For these companies, “the private cloud is far more cost efficient.”
With different market participants requiring different specifications, Raymond expects to see a hybrid approach favoured in the future. Additionally, “banks or institutions owning their own infrastructures won’t make sense.” Instead, they will buy computing units from a private cloud.
Outsourcing uptake
Although outsourcing has been an industry-wide trend, especially after the COVID-19 pandemic and the rise in remote work, the Global Asset Management report finds a number of regional differences in uptake of the strategy. North America leads the way here, driven primarily by the access that outsourcing grants them to new technologies and specialist expertise. “It’s a question of culture,” Raymond says, on why this geographical discrepancy in adoption rates exists. “In the US, working with a consultant or a contractor is something that has been around for years.” In contrast, “in France, when you’re a contractor, you sit in a different part of the building.” There’s a clear line between internal staff and those from external providers, and according to Raymond, “in many European countries, outsourcing is still seen as something quite negative.”
He expects that the differences in the uptake of outsourcing will continue, although reports that “there is a definite acceleration in Europe and Asia”. This is generally due to scaling requirements, difficulties being experienced around talent acquisition and retention, and the need to operate globally, he explains. “Sometimes solutions cannot be found within existing organisations or within the country they’re operating in,” and outsourcing becomes the only option.
ESG angst
While it may be a major growth strategy in Europe, in North America ESG remains politically in contention. This is a topic that’s “really tied to what’s happening in a country at a specific point in time,” Raymond reflects. In the US, “I don’t see things changing in the next three years,” he continues, particularly due to upcoming elections. “It will still be a highly debated topic.” In addition, Raymond states that many of Linedata’s American clients don’t fully understand ESG or the impact that it will have on their operations; better communication and education is needed.
Regulation in this area often begins in Europe, he says, stating that “the early stages of laws and regulations, when it’s sometimes quite foggy, is pretty often European”. Often, these are later adopted more widely, in some form, by the US, but are built on European ideals. ESG issues are culturally more important in Europe, he suggests, whether that’s around global warming or human rights concerns.
“In the next five years, we will get to a point where ESG differences between Europe and the US will be as tangible and measurable and easy to understand as financial differences,” Raymond predicts. He suggests that it will take at least five to 10 years “before the situation is stable for everyone”.
Cryptocurrencies
Another much-discussed topic of the moment is digital assets. Linedata’s paper reports that only eight per cent of asset managers are focusing on cryptocurrencies, a somewhat shocking figure given earlier investments in the digital asset space.
“Financial organisations have the same view of cryptocurrencies and digital assets that they did two years ago,” Raymond says. “They know they want to be part of it, if it becomes important, but they don’t know how it works.” There is no concrete understanding of whether cryptocurrencies are still relevant, or if they will be once they’re regulated — if they’re regulated, that is.
The reason that investments are dropping off now is simply because managers “had a lot of money to make in this area,” Raymond explains. “They were investing more actively, with the thought that ‘something is happening, there’s alpha to be found and I need to go even if I don’t understand’.” Now, however, firms have more on their plates and are unsure of the direction that cryptocurrencies are heading in.
“Right now, investment has been paused because it’s just not that interesting anymore,” he says. “Many firms don’t want to be trailblazers, they want to see others experiment first.” In addition, “most of the major institutions that talked about digital assets and made announcements last year are quieter about that these days”, with some even admitting that crypto is smaller than they expected. While the bubble hasn’t entirely burst, cryptocurrencies seem to be a far less enticing prospect than they were during Linedata’s last survey.
The company’s next report is scheduled for 2025. Whether this year’s trends will continue or a new list of priorities will emerge is something we’ll have to wait to find out.
