Looking Through the Prism

On the morning of Sept. 15, 2008, all hedge fund CIOs had one question on their minds: "What is our exposure to Lehman Brothers?" It was a simple enough question but establishing a definitive answer to it proved more than a little challenging to a large number of funds.

In the days and weeks after the fallout from the failure of one of Wall Street's most respected names, it became evident that most institutions didn't have the means to access mission-critical information at a moment's notice. This revelation sent them scrambling to find a fix.

It was at this time that Citi's global transaction services group started receiving requests for an improved visualization offering. Clients of the banking giant needed better insight and transparency into their investments to help them understand where those investments resided, what the underlying holdings and the characteristics of these investments were, and how those investments related to performance and risk.

During the good times, compiling such granular information in near-real-time is practically impossible, although this requirement is largely inconsequential given that returns are good and, after all, one of the Street's largest investment banks couldn't possibly fail, right?

"Before all of the mess started, we were in a place where companies with household names were perceived as having zero risk," says Kevin McPartland, senior analyst with Tabb Group. "There was no chance that a major bank would ever disappear, so the thought of a bank disappearing didn't go into their calculations of risk. But the crisis did bring a good thing to the market-it made people more aware and more conscious of the risks they take and how they manage those risks."

Chandresh Iyer, global head of custody and investment administration services at Citi, says that based on the questions they were being asked from hedge funds and asset managers, his group set about making a tool that would integrate front-end trading workstations with back-office data, and translate the resulting information into heat maps.

"Our view was that, with the cycle time of news and the need for fast information, we needed to create something much more amenable to how people deal with information in this day and age," Iyer says. "It needed to fit within their cycle time, within their workflow, so to speak."

Adding heat to the mix

Heat mapping has been used in the military for some time to identify, for example, hotspots of political unrest. The concept is applied similarly in the financial services industry to recognize poorly performing investments and areas of portfolios responsible for the greatest returns. But while the concept of visualization has been around in the financial services realm since the mid-2000s, the way in which firms are able to interact with this data has changed a great deal in recent years, says Denise Valentine, senior analyst with consultancy Aite Group.

"When I first saw this technology in 2004 and 2005, it was rather flat," she explains. "It was more about color variations back then. But they are becoming much more three-dimensional with computer-aided design (CAD) architecture and so there is more clarity around the visualization process because it is more interactive."

The end result of Citi's visualization project is its Performance and Risk Measurement Service, better known as Prism. A global asset manager with $150 billion under management is currently piloting the tool and three hedge funds are evaluating it, according to Iyer. He says the product is intended to give CIOs a real-time view of their firms' performance and risk.

"For the first time ever, we have created a linkage of information across the front office and the back office," he says. "If you think about it, historically, the front office doesn't care about what goes on in the back office. Meanwhile, the back office can be a significant source of operational risk and has to be looked at on a consistent basis."

Metamorphosis

Prism was in development for approximately three years. Prior to the Wall Street meltdown it was intended to be used to track trade settlements, but after the crisis it morphed into a tool for understanding performance and risk. Iyer says that the crisis of September 2008 provides a good example of visualization's importance.

Prior to Lehman's demise, if a trader was doing a derivative trade, he or she generally did not consider the counterparty risk from a collateral perspective, according to Iyer. But as the September events intensified and mark-to-market positions were being wound down by both sides of the industry, firms started to realize that they weren't clear whether there was sufficient collateral being held or whether that collateral was of a sufficient quality.

That information typically resides in the back office, Iyer says, adding that even if players had been using visualization technology when Lehman failed, it is unlikely they would have been able to identify the failure before it happened. But, he says, users would have been able to quickly understand where their firm stood in relation to Lehman.

Versatile

Prism is more than a specialist risk management tool-it can also be used to allow asset managers to establish a better understanding of how their investments are performing. By integrating front- and back-office data, managers can establish why a fund is performing in a certain way by correlating performance with the net flows of that investment. A hypothetical example of this is a strategy that is working well in the US, but is performing poorly in the UK.

Prism, an exception-based reporting tool, permits managers to access data quickly via a single screen, allowing them to move between geographies, asset classes, fund size and date range, while also being able to monitor fund performance, with dark green representing excellent performance and red denoting panic time.

Iyer claims that through the use of visualization technology and eliminating redundancies and errors, firms can save 50 to 250 basis points in regained performance.

"You are getting back real alpha-this is not hypothetical alpha-if you have a streamlined investment operations platform," he says.

While the product is being geared toward CIOs and asset managers, Citi also feels that heat mapping can be an effective tool for sell-side traders, says Rajiv Ohri, director of investor services at Citi.

"Traders look at three, four, or five screens, but they are looking at one metric," he says. "They are making trading decisions based on that [metric] and the rest of it is just noise that they want to correlate as they are forming inferences. So in their mind trading is simple, even though they are absorbing a lot of information."

Celent's Valentine says traders have been slow to embrace visualization technology. From what she has found, they are still more interested in seeing data presented in graphs. But she also notes that the one thing that new visualization technology has going for it is that traders are always willing to tinker with new, interesting tools.

"While I don't see much interest from traders, that can change," she says. "Every year, someone comes out and they tweak it just a little bit or they maneuver something, so who knows?"

Work in progress

Citi plans to continue making incremental adjustments to Prism. Initially, it looked at performance and risk, as per clients' requests, while the next phase will include more compliance monitoring, post-trade transaction processing, and data reconciliation breaks for metrics and broker scorecards. The global transaction services group, a branch of Citi's institutional clients group (ICG), spent $1 billion on technology last year in the transaction services group alone, according to the firm. If that figure is accurate, it would appear that the money is available to ensure that these changes transpire.

Future developments will also allow clients to create their own view of information as regulations regarding derivatives and central counterparties come down the pike, Ohri says.