Make the Complex Simple: Performance Measurement, Attribution and Risk (PMAR)

 

The ability to understand the key drivers of performance and risk is fundamental to the investment management process – but calculating accurate value-add analytics can raise significant challenges for technology, data and process

Background

  • The PMAR process can be defined as having a number of key steps: the collation and validation of source analytics, the calculation of timely and accurate performance analytics, and the ability to attribute the drivers of alpha against a risk-adjusted performance landscape. PMAR therefore remains a key differentiator between investment managers
  • For investment managers, the volumes and complexity of data ownership in the PMAR space, as well as data usage on an enterprise basis for both internal and external clients, continue to provide significant challenges

Why is it important for our clients?

  • PMAR is fundamental to the investment management process; it helps to measure effectiveness (over/under performance of investment strategies), generate and implement ideas, and manage risk
  • Greater client sophistication and stricter regulatory demands for transparency mean that investment managers are under increased pressure, not just to explain their performance, but to justify the risk premium they apply in delivering their returns
Delivering performance and risk analytics fast enough for Front Office, but controlled and precise enough for middle office external client requirements is the PMAR end game.
Greg Faragher-Thomas, Alpha Director

Key challenges for investment managers

Some of the challenges facing our clients include:

  • Reducing manual intervention by the Performance & Risk Team to benefit from scalability gains, resulting in a higher ROI
  • Delivering performance and risk analytics fast enough for the Front Office (I-BoR), but precise enough for middle office (A-BoR) external client requirements
  • Use of price-aligned analytics for PMAR that flow from a ‘Golden Source’ Performance book of Record (P-BoR)
  • Improved value-add of a client data architecture to broadcast PMAR value add and reduce potential vendor costs
  • Whilst long-only equity attribution (Brinson) is market standard, fixed income, multi-asset and strategy-based attribution continue to pose a challenge
  • The expanding use of alternative asset classes (e.g. real estate – actual vs. projected cash flows, private equity – lagged vs. non-lagged) creates additional challenges for performance and risk analysis
  • The acquisition of Barclays Risk Analytics and Index Solutions (BRAIS) by Bloomberg has led to significant uncertainty for POINT clients
  • Benchmark management, both in initial construction and its maintenance, continues to create challenges for Total Cost of Ownership (TCO) in the market data cost space

How can Alpha help?

Alpha brings deep, market-leading expertise in the PMAR domain, supporting clients at all stages of the project lifecycle:

  • Vendor Selection & Management: Vendor functionality heat maps providing accelerated long-to medium-to short-list RFP and POC delivery
  • Market Best Practice and Thought Leadership: Attribution LAB is the go-to think tank for PMAR, and the Alpha PMAR Team contributes to CFA technical papers
  • Target Operating Model: We quickly understand our clients’ requirements and can help design and implement technology, process, data and organisational solutions to meet the demands of the most complex investment managers
  • Implementation: Project management and SME support for PMAR operating model implementations, both as standalone PMAR initiatives and as part of broader technology platform changes or regulatory initiatives