A Fund Management System can mean a system for any type of fund. This article focuses on what it means for Asset Managers such as Mutual Fund Managers.
We will explore various types of buy side fund technology. This includes what functional scope such a system can have, and the cost depending on the type of system. We’ll not touch on differences between stocks, bonds and other asset classes, although when selecting a system, this is an essential consideration for you.
This article isn’t a pitch for any solution. It’s merely an educational article on the topic of Fund Manager Software. In light of that goal, we want to be transparent with the fact that Limina provides Investment Management Software (IMS).
What is Software for Fund Managers?
A Fund Manager needs systems to operate its front, middle and back office. Below is an illustration of the functional areas and how different types of systems, such as Investment Portfolio Management Solutions, can fit in the various departments.
Front Office: Portfolio Management Software (PMS)
In the front office, Portfolio Managers need first to construct target portfolios. Such portfolios can be discretionary model portfolios or indices (for passive managers). When inflows arrive from investors, the cash is distributed to the target portfolio weights using the portfolio management tool. The result is orders, ready to be passed on to the Order Management System (OMS).
Front Office: Trade Order Management System (OMS) and Execution Management System (EMS)
An OMS is responsible for creating orders from the PMS, such as block orders and program trades. The system checks post and pre-trade investment compliance, and the Portfolio Manager passes orders to trading. Execution can happen in an EMS, be outsourced or by direct broker connectivity from the OMS.
Once orders have been executed, the OMS handles allocation and sends these to the custodian(s) and fund admin for affirmation and booking.
An IBOR is another way to say Position and Cash Management. A 3rd generation (live-extract) IBOR can provide a view of portfolios from different perspectives, all based on a single source of truth. Operations might want to see settled cash and trade date position as per NAV cutoff. In contrast, Portfolio Managers want to see cash forecasting, including assumptions around fees for orders in the market.
Investment Data Management Solutions handle, for example, the securities master, including classifications that might be needed for portfolio construction or compliance. Capabilities can also include data quality controls, such as pricing issues, unprocessed orders and cash import delays.
Other Middle Office Capabilities: Portfolio Risk Software and Performance Attribution
Risk and performance measurement are two functional areas that typically fall into the middle-office function. It’s worth noting that these are different from most other functions discussed in this article because risk and performance are typically not part of the investment workflow. Everything else we discuss ties together in an end-to-end workflow, with a starting and ending point.
Portfolio risk management typically involves calculating portfolio exposure and risk measures, such as Value-at-Risk (VaR). It also covers scenario risk, such as the capability to simulate what would happen to our current portfolio during the 2008 financial crisis. The output of portfolio risk systems can be for internal controls, investor reporting or regulatory reporting.
Performance attribution answers questions such as “Did higher exposure to Europe, compared to my benchmark, create alpha?”. It can be used for follow-up and reporting.
Shadow NAV and Investment Accounting
Investment operations typically span both the middle office and back office. The first task is to ensure all investment data in the system is correct, starting with trade matching. Then comes cast management and the ability to accrue non-trading activities and book deposits. Thirdly, the software must be capable of processing corporate actions and position lifecycle events.
Once all data is accurate, the result is typically reconciled against the custodian and fund administrator. Such reconciliation includes cash, positions, P&L and NAV. Finally, if you manage accounting internally, a general ledger is produced by an investment accounting system.
Costs of Fund Management Platforms
The cost of buy side fund technology can vary quite dramatically. First of all, it’s essential to understand that there are eight drivers of the cost of Investment Management Software.
It is also important to note is that not all cost drivers will apply to all solutions. For example, a cloud-native solution typically has fewer and lower additional costs. On the other hand, an on-premise solution is likely to have many hidden fees, all of which might not be apparent upfront.
Cost Range to Expect from Fund Manager Software
The pure software cost of a buy-side system can vary anywhere from $30,000 per annum to $4,000,000. Note that this is just for the investment management software tools, i.e. just one of the eight potential costs listed above.
Why the massive cost difference? On the lower end of the scale, you will find elementary software systems designed for managing one portfolio. At the other end of the spectrum are comprehensive platforms intended to service the largest Asset Managers in the world that might have hundreds or even thousands of portfolios, including both mutual funds and ETFs.
At Limina, we provide transparent price examples so you can see where we fall in this range and understand which use cases our product is best suited for.
Is a Front-to-Back Office System (F2B) the Best Fund Management Software?
A Front-to-Back or Front-to-Mid office system typically covers most capability areas discussed here. It opposes best-of-breed Investment Management Systems, where one solution for each capabilities area is selected, and then integrated. The investment management industry used to be dominated by best-of-breed solutions in the 90s, but these were both expensive and risky to integrate.
As a counter-reaction, front-to-mid/back systems have become increasingly popular. Another term for systems that span all functional areas, except general ledger, is Investment Management Platform, of which Limina is one. At Limina we’re all for transparency, so we have also created two honest articles that describe who Limina’s Investment Portfolio Management Software is for as well as when Limina isn’t the right fit.
We hope this article has been insightful in providing a better view of fund management software’s various capabilities and costs. If you want to learn more, contact us for a no-strings attached demo of our platform.