Asset/Fund management application of the VAR+/DATA+ systems

CD Financial Technology Ltd (CDFT) has delivered a risk management/reporting/planning system for one of the market-leading institutions in asset/fund management, the Deutsche Asset Management Gmbh (DeAM). The delivery consists of the systems VAR+ and DATA+, and it is intended for both management /external risk reporting, and for internal planning use by fund managers.

Two types of fund management mandates are in general use in the industry. According to the traditional mandate, the customer mandates the manager to invest funds in a portfolio such that the manager can decide the exact structure of it but that the investment performance is measured against an agreed benchmark, such as the FT-100 index. If this type of agreement is adopted, then the manager performance and customer satisfaction is measured by how well the manager performs against the index. This is measured typically by monitoring the tracking error achieved by the manager.

The main problem with the traditional mandate has been highlighted during the recent fall and turbulence in the stock market. A manager may have achieved even a near zero tracking error, and yet he may have lost a half of the customer investment.

An alternative type of mandate, based on absolute return requirement, has been evolving in the market, initially in particular through the increasing supply of hedge funds. In this type of mandate, a manager is given, subject to some constraints in instruments and markets, the right to go long, short or stay flat in the market. He is also given a risk limit, according to which he has the right to invest at, say, 10% annual volatility level in the agreed markets/instruments. The combination of risk limit and the right to stay on whichever side of the market the manager chooses jointly establish an investment structure, in which the manager should be able to beat the riskless return by a sufficient margin. The size of the target margin over the riskless return can be computed from the risk allowance – the more risk appetite the investor is willing to accept, the higher return in excess of the riskless investment he can rightly expect from the manager.

Monitoring performance of either type of the above mandates or any other type of mandate in a satisfactory manner sets stringent requirements on systems. Yet further demands are laid out by any information needs for intended position planning purposes.

The CD Financial Technology Ltd solution has special advantages in meeting the specific needs of an information and planning system for the asset management industry. The company’s solution applies the structured Monte Carlo simulation as the underlying technology, and thereby implements completely the full valuation principle, as known in the banking sector regulatory guidelines. The crucial implication of this is that any calculations produced on the CDFT systems measure the value and risk characteristics of any position to the degree of accuracy sufficient for pricing purposes.

All solutions are customer specific in the sense that each customer can have the complete description of his own positions and their upside/downside potential. The relevance and accuracy of the customer specific model can be continuously evaluated by the statistical back-testing functionality. No positions are represented by proxies or models of any kind. Even benchmarks can be measured similarly: their values can be either exactly replicated by actual benchmark portfolios, or their market values can be imported directly from market feeds. This general approach makes it possible to accurately analyze the performance of positions against any kinds of benchmarks and in any types of mandates. On the basis of such extensive performance information, portfolio managers are able to design most qualified contingency plans to achieve and exceed their varied benchmarks.

A further advantage of the CDFT Solution is that both the portfolio structures, basic inputs into valuation (e.g. yield and spread curves and volatilities) and the pricing and valuation functions themselves can be flexibly changed and modified. In principle, no black box sections of the systems exist, bar what is necessary for protecting supplier copyrights and intellectual property rights.