MARKET NOTE
Larry Tabb, Research Chairman and Founder
The Multi-Asset Buy Side: Overkill, or Table Stakes?
Introduction
Trading success historically has revolved around focus. The
more intense the focus, the more successful the trading
strategy. In banks and brokerage firms, this has influenced
their organizational and technological alignment. The world,
however, is changing, as new technologies such as
algorithms, data science, cloud infrastructure, and open-
source software are enabling firms to analyze information
more quickly and reduce tick-to-trade times and investment
turnaround. Technology not only is redefining the job; it’s
reshaping the business. Many trading decisions are
executed, if not driven by, machine.
Technology is changing the nature of investing.
Today, computers pore over financial information, reading
and determining the sentiment of news and social media;
satellites look down from the cosmos and measure crop
yields, mining production, and car and parking lot densities;
and billboards measure rush-hour traffic and, combined with
cell signals, help determine the demographics of passersby.
So, with all this new alternative information, why are
traditional active equity managers still struggling? Why
aren’t active investors’ jobs getting easier?
It is precisely because new technology, data science, and
investment structures are increasing competition, culling the
wheat from the chaff. This makes money management
more difficult, especially at the institutional level, as
investment timeframes compress. Real-time tradable ETFs
also increase competition by commoditizing many
benchmark investment strategies. And, finally, firms such as
Fidelity are increasing competition by adding fulcrum and
zero-fee products, driving traditional management fees into
the ground.
Is this the end of active management? Absolutely not.
A New Strategy Imperative
There are three major focal points that active managers
must have at the forefront of their minds in this age of
compressed timeframes: product, implementation, and
process.
©2019 The TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. | 1
February 2019
First, active managers need to hone their product, pricing,
and marketing to tie into investor demand. They need their
investment strategies to perform, be fee-sensitive, and
manage downside risk without giving up too much
performance. That is a tall order.
Second, active managers need to rethink their alpha
implementation ideas, moving away from traditional
rich/cheap value analysis and toward more complex
strategy implementation ideas that cut across traditional
asset class barriers. They need to think seriously about how
to more adequately implement an investment thesis. The
answer may not be just buying equities but in augmenting
equity strategies with financial products that gain precise
exposures without adding unwanted risks.
Third, as firms move away from siloed investment
implementations, they need to rethink their infrastructure
(read: technology), so that portfolio managers can run their
investments across asset classes. They should see their
positions aggregated across the strategies, and implement
them in either multi-asset solutions or very tightly integrated
solutions, so equities, debt, options, futures, swaps,
financings, and other products can be analyzed, traded,
settled and viewed as part of an integrated strategy.
Let’s discuss the infrastructure side of the challenge. Any
money management firm today not only needs scale, but
efficiency as well. Anyone charging a management fee of
zero cannot make up for lost margins with additional
volume. As fee pressure mounts on managers, they no
longer have the leisure to worry about asset collection and
infrastructure rationalization. Many money managers are
the aggregate of smaller managers. Unless these
unconsolidated organizations have found the proverbial
goose and can hatch golden eggs, they need to harvest
corporate synergies by quickly consolidating operations,
technology, and infrastructure.
This means rationalizing multiple processing infrastructures
into fewer and maybe even one; from single-product
platforms per management silo to multi-product platforms
that can process across currencies and regions. Order and
execution management platforms that are aligned by a
single asset class already are a reality. The next horizon is
 The Multi-Asset Buy Side: Overkill, or Table Stakes? | February 2019

a unified processing infrastructure that can process bonds, Exhibit 2: Trading Desk Initiatives
swaps, mortgages, derivatives, Treasuries and Bunds as
easily as it can trade an equity. 61%

This is directly aligned with institutional equity firms’

strategic initiatives, as 47% of the 100 buy-side head U.S.
equity traders we interviewed in 2018 mentioned that
automating their non-critical functions and improving their
technology infrastructure was their most significant
25%
business initiative. In addition, if you add the 20% of firms
that discussed upgrading their EMS/OMS platforms, that
13%
bumps up the percentage of firms that are pushing
automation to almost 70% of funds (see Exhibit 1).

Exhibit 1: Major Buy-side Technology Initiatives Technology Execution Relationships

Quality
Automate Non-Critical/
47% Source: TABB Group
Improve Technology

OMS/EMS Upgrades 20%

Incorporate Advanced Data
& Analytics
We are automated enough
Post trade Improvements 7%
Fees and return pressures are polarizing the market into
two categories of asset managers: pure beta (passive) and
exceptional alpha generators. As investors vote with their
14%
flow away from the lower-quality and more expensive active
managers toward passive strategies (see Exhibit 3), the
flow concentrates in benchmark securities (those within
12% indices). This trend further pressures sub-standard
managers and swings flow either to the truly exceptional
alpha generators or the increasingly bland index-style
offerings.

Source: TABB Group

Exhibit 3: Net Fund Flows from Active to Passive ($Billions)

$2,000

Even rationalizing each firm to a single priority, improving $1,573

internal technology was the overwhelming strategic initiative $1,500

in which institutional investors were investing, above

execution quality and improving their broker relationships $1,000

(see Exhibit 2). $1,005

Billions

$500

While rationalizing a firm’s infrastructure is critical and

provides efficiency, what a firm can do once it has a unified $0

processing infrastructure is probably more important than

just shaving off a few basis points in management fees. A -$500
-$568
consolidated platform opens up the fund to an array of new
capabilities. -$1,000

Net Difference Cumulative Active Equity Cumulative ETF

Increased competition Source: TABB Group

Fee pressure isn’t impacting only managers’ expense

ratios; it’s applying pressure on investment returns as well. Firms will need to understand, and take advantage of,
As investment fees come under scrutiny, any adverse differing ways to find alpha, through asset selection and
slippage and style drift by traditional managers creates implementation of investment ideas. While managers have
awkward performance discussions with their investors. typically gained corporate exposure through buying equity,
increasingly, firms will need to analyze how equity exposure
©2019 The TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. | 2

aligns with corporate debt, equity options, credit default
swaps, whole loans, and even sovereign debt, since an
equity exposure has a risk-free rate (sovereign debt) as well
as a corporate balance sheet component. They must learn
how to capture the upside (or downside) of an investment
while limiting risk. This could be captured through options,
debt, or traded through a total return or equity swap. To be
one of the truly exceptional, firms will need to adopt different
investment strategies.
While machines are good at repetitive tasks, it takes insight
to fully understand the full paragon of investment
implementation strategies. Machines will be able to tell you
the value of Apple stock, not only based on last quarter’s
earnings, but, increasingly, through the sentiment of
managements’ last quarterly earnings call, news and
tweets, card swipes at Apple stores, and purchases at
apple.com. They will leverage satellites to track parking lot
images and sensors for foot traffic. Any number of
alternative data sources can note on a moment’s notice
changes in purchase demand and sentiment.
While machines will be able to hone their value analysis of
Apple to a gnat’s eyelash, what if it isn’t the equity that
should be in play? Maybe it’s an option or a bond? Maybe
the stock is rich and should be shorted, but the bond is
cheap? But what if we really don’t want an interest rate
play? A U.S. Treasury or fixed income future could be
shorted to insulate the strategy from Federal Reserve rate
policy. Increasingly, commodities, energy, and metals will
also be used to analyze value, as valuation models in the
soft commodities will have implications for farm equipment
providers as well as the supply chain partners or their
partners’ partners.
The implementation of these strategies is not particularly
easy. In fact, most of the 100 head U.S. equity traders we
interviewed were doing nothing but going with the flow as
the investment world pushes toward passive strategies:
57% of the firms we interviewed were staying the course,
19% were implementing new passive strategies, 12% were
implementing additional active strategies, and only 7% were
expanding into new asset classes (see Exhibit 4).
The problem is that most investment managers do not have
the leeway to invest in these complex investment
implementations, nor the automated compliance
infrastructure to ensure that managers investments and
allocations fit within their mandates. Their technology
infrastructures, bought as best-of-breed, do not bring the
integration needed to analyze these opportunities, nor
insure compliance, trade them, capture the data in a single
location, nor value them in a way to harvest these types of
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The Multi-Asset Buy Side: Overkill, or Table Stakes? | February 2019
Exhibit 4: Percentage of Firms Reacting to Passive Influences
57%
19%
12%
7%
5%
Do Nothing/Staying Introducing New Adding New Expansion into New New Fee Structures
the Course Passive Strategies Strategies Asset
Classes/Regions
Source: TABB Group
complex investment strategies. This requires moving from
best-of-breed-type investment platforms to ones that
provide a more comprehensive service and compliance
offering.
Getting to Technology Nirvana
Creating this level of integration is not easy. The first level
of integration is just enabling the platforms to process
different asset classes or transcend geographic boundaries.
This is no mean feat. While equities are fairly vanilla,
equities processing is more defined by its multi-currency
processing, clearing, connectivity, geographic regulatory
regimes, and corporate actions nuances.
Once you start trying to integrate fixed income products, a
whole host of issues appears, not the least of which are
calculation methodologies. Different instruments have
different calculation routines, as traditional notes and bonds
pay semi-annual interest, discount notes don’t pay interest
at all, and many mortgage-type products pay monthly
principle and interest payments. In addition, the actual
calculation routines can differ by country and product, such
as a 360- vs. 365-day count. Futures and foreign exchange
also create challenges, as products trade at various
exchanges and have different clearing mechanisms. All that
doesn’t even take into account the market data, valuation,
and corporate actions that are needed.
However, calculation and processing are just table stakes.
Once firms start creating synthetic exposures, they need to
be able to link these products together and provide
integrated compliance. While it would be great to process
bonds, futures, and equities in a single platform, if they can’t
be displayed together on the same screens, then it
becomes difficult ensuring compliance, tracking the various

component parts versus the individual pieces, or just
obtaining a comprehensive view of the portfolio. Just
looking at using U.S. Treasury Notes to hedge two different
deals; what if one deal required a long position while the
other deal required a short position? While the net position
may be net flat, if the platform flattens out the long and short,
the hedges, the U.S. Treasury aspects of those two deals
go away, and the economics may be compromised.
In addition, the market structure employed to trade these
products can also differ. Equities not only are predominantly
traded on an agency basis in exchange-based limit order
books, but also some are traded in dark pools, and others
on the balance sheet of banks and dealers over the counter
(OTC). Bonds are almost the exact opposite with the
majority being traded OTC, through phone, RFQ platforms,
and to a smaller extent, electronic central limit order books.
As efficiency becomes more critical, integrating all of these
trading styles into a single technology stack, will not be just
a nice to have but a central core of a firms’ processing
facilities. Not only is developing an integrated trading
technology stack into the core processing facilities of a firm,
difficult, but the ability to visualize, trade, process, link and
account for a world of heterogenous products is very difficult
and should not be discounted.
Tech Stack Consolidation
Major organizations are making billion-dollar investments to
facilitate this transition and are consolidating the technology
stack to service clients in just this fashion. This has been
the defining factor surrounding two major financial
technology acquisitions made during the last few months.
First, Eze Software was acquired by SS&C, one of the
largest hedge fund accounting platforms. Eze Software, the
leading provider of hedge fund order management
technology, now has the potential to be more tightly linked
to SS&C’s GlobeOp hedge fund accounting platform. This
combination of technologies enables SS&C to provide
greater service and support to a wider array of hedge funds
and investment strategies.
The second example of how the technology stack is
consolidating is State Street Bank’s acquisition of Charles
River Development. The combination of these two
businesses, not unlike Eze Software and GlobeOp, links the
front end of the investment process of one of leading
traditional money manager order management systems
with the custody and services businesses of State Street,
one of the top global custodians.
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The Multi-Asset Buy Side: Overkill, or Table Stakes? | February 2019
New Architectures
The platforms that can handle the challenge will be a
consolidation of portfolio and order and execution
management, with a consolidated and integrated overlay of
portfolio accounting and compliance. These platforms will
be multi-asset class, multi-geo and multi-utility, as the
demands of a hedge fund are not the same as those of a
mutual fund and certainly are not what either an insurance
company or pension fund require.
The only way this will be fulfilled is through new ways of
thinking through the problem set. While cloud and ASP-
based solutions will most likely be core—and open source
technology will most certainly be a part—software firms
moving into the next decade will need to rethink how they
develop, service, and charge for software. On the latter, the
ability to charge multi-million-dollar licensing and
maintenance fees will certainly drive scrutiny. These key
drivers are reshaping the competitive technology landscape
today and will drive the industry into the future.
Conclusion
Firms and funds need to start thinking of their investment
horizon differently. As the juices get squeezed from
traditional asset management strategies by low-cost funds
and packaged products, the managers that will remain will
either have the scale to compete with the Vanguards and
BlackRocks, or have the flexibility, agility and streamlined
infrastructure to analyze the market from a different
perspective and rethink the investment process. This only
can be accomplished by a firm with the capabilities to
analyze, position, trade, and account for a more varied and
complex investment strategy that will increase yields,
reduce risk, and allow managers to crush, not just beat, their
benchmarks. This, however, only can be done through a
more highly functional and streamlined technology
platform—one that not only handles the traditional, but the
complex and difficult strategies with ease.
As the industry continues to wrestle with investors’ fixation
on passive investing, traditional asset and hedge fund
managers need to do more with less. They need to develop
undiscovered and under-monetized alpha sources more
efficiently and effectively than ever before. This will push the
buy side to increasingly consolidate trading to professionals
(and technologies) that can effectively locate and harvest
alpha opportunities that are presented no matter the asset
class, product type, or geography. Firms that do this right
will be rewarded, while those that don’t will increasingly be
relegated to oblivion – or, if they are lucky, consolidated into
the menagerie of amalgamated platforms the winners call
scale.
