With the purchase of FinAnalytica, the performance measurement vendor can respond to user demands for risk analytics.
Performance measurement vendor BISAM’s just announced acquisition of risk analytics specialist FinAnalytica is a response to growing demands among buy-side firms for a unified performance and risk approach, and industry observers are in agreement that the two disciplines are on a parallel and perhaps intersecting path.
BISAM officials are not disclosing the financial arrangements for the acquisition but they are pointing to closer ties between the two environments — B-One from BISAM and Cognity from FinAnalytica. Targeted for the buy side, Cognity offers multi-asset class market risk support, portfolio construction and investment decision analytics, officials say.
“While Cognity (risk) and B-One (performance and attribution) will continue to be offered as standalone platforms, there are immediate benefits that users of both products will realize, including integrated, multi-asset class factor-based risk and performance attribution,” a BISAM spokesperson says in response to questions from FTF News.
“We also plan to introduce FinAnalytica’s advanced fat tail modeling into the BISAM B-One platform — passing data on tail risk and sensitivities into B-One so that users can take advantage of the more advanced risk analytics that the Cognity platform provides,” the spokesperson adds.
Overall, the BISAM acquisition has been driven “by several key industry trends including a shift toward risk-factor based allocation approaches, pressure from asset owners for a deeper understanding of both risk and performance profiles, and the race for higher performing investment strategies,” say BISAM officials.
Risk management is “a natural outgrowth of investment performance measurement,” says Laurie Hesketh, director at consultancy Meradia Group.
“Indeed, a critical factor in the evaluation of financial performance is the ability of an investor to identify drivers of risk alongside the drivers of returns. This has always been a challenge for investment performance systems since underlying economic, ESG [economic, social and governance] and other risk factors are nuanced and require significant and mature security and market reference data attributes, historical performance returns and the ability to model potential outcomes,” Hesketh says.
“The evaluation and measurement of risk is much more extensive than the suite of ex-post statistics that most performance systems can provide today,” Hesketh adds. “Bringing these capabilities together makes sense and can help streamline operational functions and simplify the production of cohesive outputs. At Meradia we’ve long thought that the industry was moving in a direction that would simplify the collection and analysis of data assets necessary to make these risk analytics possible in investment performance systems.”
From an end-user’s perspective, unifying performance measurement and risk management makes total sense, says an industry source. “Performance and risk are two sides of the same coin. They need to be looked at together. However, I am not sure that the same provider needs to be an expert at both,” the source says.
In fact, it’s possible that other providers could move toward unity.
“StatPro just announced its acquisition of Investor Analytics a few weeks ago,” the source says. “There is certainly a lot of consolidation and a rush to being a provider to all. And there are others that already have this model, namely [MSCI] Barra.”
In January, StatPro Group, a vendor of cloud-based portfolio analysis solutions for asset managers, acquired Investor Analytics, a provider of cloud-based risk analytics services to hedge funds and asset managers.
While the closer ties between the disciplines makes sense, end-user firms cannot put all of their trust into a single unified offering. “Risk is like a religion and some people don’t have faith in anything but,” the industry source says. “Even if one firm does have ‘a’ solution for both risk and performance, if the models of risk are not in line with beliefs, the risk numbers may be useless.”
Many asset managers use their own risk models “that may or may not match up with the risk capabilities of vendors,” says Phil Sindel, senior managing director for Boston-based consultancy Olmstead Associates. “Therefore, the asset managers would be perfectly happy combining a vendor’s performance calculations with internal risk capabilities.” Some vendors may conclude that this is the given landscape and “will probably not be interested in pursuing acquisitions that combine both,” Sindel says.
However, if a vendor does not to acquire the functions they lack, “then the ability to more easily integrate to provide the unification between risk and performance will be required,” adds Sindel, who is responsible for Olmstead’s core project consulting and professional development businesses.
In addition, if vendors sidestep the acquisition path, they may opt to add functions, says Gavin Little-Gill, executive vice president for Olmstead, overseeing the quality of the consultancy’s services and content. “Across the vendor landscape you see firms beginning to add functionality in order to meet the demands of its clients,” Little-Gill says. “In the risk and analytics space, we’re seeing it already from firms like [data and analytics vendor] FactSet who offer risk and performance solution.”
However it is achieved, unified performance and risk “largely serves the same client and allows firms to ensure consistent data use,” Little-Gill adds. “The trend is consistent with the desire by asset management firms to consolidate applications and moves they have made to consolidate vendor solutions.”
The unification could wind up being good news for buy-side firms.
“Since the asset management industry can be boiled down to two words, risk and return, this does ring true,” Sindel says. “In addition with the emphasis on risk resulting from the last recession, being able to better know your risk-adjusted performance is a big positive to the buy side.”
For additional questions regarding this strategic acquisition, BISAM and Laurie Hesketh of Meradia Group will be present at the FTF Performance Measurement Americas Conference next week, March 10-11, 2016.