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How to Solve Common Buy-Side Valuation and Risk Challenges

At FINCAD we work with many buy-side firms to help solve their difficult portfolio and risk management challenges. Every client situation is unique, but we’ve been able to identify some common problems they face, which are holding them back from realizing good profitability.  

In today’s blog post, we will cover two of these issues in some detail. We will also review how a sophisticated portfolio and risk management solution built on a flexible technology platform can help firms overcome these specific issues.

Trend #1: Moving off Error-prone Spreadsheets

Many financial institutions rely on spreadsheets to deal with valuation and risk calculations that their core systems cannot handle effectively. This is a trend we’ve seen in all different types of buy-side firms – from asset managers to pensions to hedge funds. However while, spreadsheets offer incredible power and flexibility to investigate potential investment strategies, they do have a serious downside. With that flexibility comes a lack of control, and studies consistently show that the majority of spreadsheets contain material errors.

Some of these errors stem from issues with version control. The simple task of passing around a spreadsheet to other department members who might add or change something in the workbook, creates the risk for manual error. Depending on the severity of the error, a firm’s profit or integrity could be compromised.

Firms need to be aware of this operational risk and be proactive about controlling it in order to safeguard their businesses. For many leading institutions, the answer has been to lessen their reliance on spreadsheets and introduce a robust valuation and risk solution, such as FINCAD F3. This approach is helping them better manage risk in a landscape where calculations are becoming more complex and emerging regulations are introducing stringent risk data aggregation and reporting requirements that would be very difficult to meet using Excel alone.

Trend #2: Consolidating Valuations from Multiple Systems

Several clients we’ve spoken with are using multiple vendor systems for calculating valuations on different parts of their portfolio. Often one tool will be used to value vanilla instruments, while other(s) will be used to value various types of more complex products.

There are distinct pitfalls to this approach. In fact, one of our clients, a Netherlands-based bank, had been using three separate systems for valuing different parts of their portfolio. The difficulty they ran into here is that each system had a different methodology for calculating valuations. Therefore, there was an increased risk for valuation errors to arise. The bank recently implemented FINCAD F3, and are pleased to have been able to establish consistency across all of their valuations from vanilla through to structured products. Having access to consistent, accurate valuation and risk data will enable the bank to make the best possible investment decisions going forward.

When firms continue to use multiple systems for valuations they will often need to invest time and money in reconciling the data from these different systems. Also, if you consider the sheer overhead and licensing expense of keeping, for instance, three or four vendor systems up and running, versus just one, the cost savings become apparent.  

Similar to the Netherlands bank, many other firms have come to FINCAD looking to consolidate systems used for valuations in order to reduce cost and improve the consistency of valuations. The fact is that FINCAD F3 generates more accurate pricing, valuation and risk calculations, enabling these firms to improve trading and hedging decisions. Better decisions lead to better investment returns, which is what most of our clients are after.

And while consolidating down to one system allows firms to scale back significantly on operating costs, there is also cost savings to be had in no longer needing to reconcile the data from those disparate systems. Using FINCAD F3, portfolio managers, traders and risk managers from across the business are aligned with a consistent set of valuation and risk reports, which can be run anytime, on-demand, completely eliminating the need for front and middle-office reconciliation.

For more on how FINCAD F3 can help your firm overcome the above challenges and other common buy-side technology issues, watch this 90 second FINCAD F3 video. Also check back here in the coming weeks, for our next post, which will discuss additional technology trends we’ve seen with our clients. 

About the author

James Church

VP, Product and R&D, FINCAD

James Church is Vice President of Product Management and R&D at FINCAD, and is responsible for the strategic direction of all FINCAD products. He has over 15 years of experience in the software industry. Before joining FINCAD James was Vice President of OLAP Product Management at Business Objects, and prior to that was Director of OLAP Product Management at Crystal Decisions. He studied Computer Science at North Staffordshire University in the U.K.

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