4 Features Portfolio Risk Management Software Should Include
Hurricanes, floods, revolutions, terrorist attacks. These are uncontrollable events that impact the stock market in ways that cannot be anticipated.
Depending upon the aftermath, oil prices, for example, could see huge increases or decreases. These are examples of system risk in investments – events and circumstances that cannot be controlled but that can impact investment portfolios, at least in the short-term.
Then there are non-systemic risks – those associated with industry, sector, and individual enterprises. It is the task of portfolio managers to analyze and anticipate risk factors and to act appropriately to minimize any loss and to stabilize portfolios for maximum gains.
After all, individual investors are looking for profits from their portfolios of investments, and they have high expectations when they put those portfolios in the hands of a manager.
Traditionally, managing portfolio risk involves two strategies:
- Allocation of Assets. Accumulating different asset classes in portfolios understanding the probability that some will bring good returns even though others are either flat or even losing value.
- Diversification. Dividing allocations of funds in one asset class (e.g., stocks) among a variety of categories within that class (e.g., oil, technology, financials, etc.) serves to diversify risks.
Big Data Chimes In Portfolio Management
Like in every other sector, big data has now disrupted the methods by which portfolio managers gather and analyze the information they need.
Data science can pull an amazing amount of data, categorize it, analyze it, and new software can be developed that incorporates all of this data – data that allows portfolio managers to use predictive analysis in determining the measure of risk.
Investment risk management software development has now become an entire industry on its own, and there is an ever-increasing number of investment management software vendors that promise to provide data and strategies for client portfolio management.
Exactly What Does Risk Management Software Do?
Basically, risk management software identifies the risks that are associated with sets of assets and then communicates this risk to investment and portfolio managers, usually via on-screen dashboards. Identification occurs through the collection and collation of data across an entire asset sector.
What Types of Risks Can Be Identified and Reported Through Risk Management Software Tools?
Investment risk can be financial – credit or interest rate risk or financial market uncertainty.
Investment risk software can also address accidents, natural causes and disasters, project failures, legal and compliance liabilities, and deliberate attacks from adversaries and hackers.
This can be accomplished through “what if” scenarios that can be generated through the right portfolio risk analysis software.
Obviously, financial risk management software requirements are complex and multi-faceted, and it is difficult to know how to develop portfolio management software and what trading risk management software features should be included.
The following features list may be of some help if you are looking for custom investment risk management software development, either in-house or outsourced. It has been divided into four categories, all of which can and should be integrated into one system.
Appropriate software should provide daily accrual and accounting of pooled funds. A single store of data should serve as a central repository from which detailed history, all portfolio activity, trades, positions, etc. can be pulled, all the way back to the hour an asset was added to a portfolio or to the day that a portfolio was first opened.
These are the specific features that the accounting portion of the software should include:
- Automatic projection of cash flows and valuations, providing for “what if” scenarios and side by side comparison analyses.
- Scheduled projections of principal/interest payments, dividends, distributions, fees, etc.
- Tax lot costing methods.
- Create and manage complex fee schedules.
- Tracking of interest rate swaps, preferably on a daily basis.
- Real-time cash accounting and analysis.
- Daily reconciliation activity through the use of integrated tools.
- Audit security features that control who can access and make changes to transaction activity.
The key here is integration and central data storage so that data remains consistent for every user.
This eliminates the movement of data from one system to another, as different users attempt to generate stats, reports, or manage their clients’ portfolios. This old system resulted in errors, a waste of time.
Today portfolio managers need to focus on an asset rather than data management. Here are the specific features that should be present:
- Track all data history for trades, instruments, portfolios, etc.
- Automated queries and spreadsheet import and export.
- Sending and receiving data updates from trades, clients, brokers, custodians, etc.
- Automatic updates with a reconciliation engine.
- A scenario tool that a portfolio manager can use to review specific trades and the impact they will have on portfolio performance before a trade is actually executed. The best of all possible worlds is to be able to review several trade scenarios at once. Analytics should be in real-time so that the best trade decision can be made and executed immediately.
- Portfolio modeling. This allows a manager to set up models that will keep the holdings within specific parameters. When a parameter is breached, the tools can notify and make suggestions for trades. Client goals and strategies are protected.
- Portfolio modeling that will analyze “what if” scenarios, either during rebalancing or when executing a trade, as well as cash and liquidity analytics.
- Access restriction.
- Compliance. Pre-set rules should be in the place that will automatically determine the compliance of any trade with SEC regs, internal organization policies, or client parameters. Alerts should come before any trade is made. As new “rules” are established, they should be easy to update.
3. Performance Measurement
Performance management tools will allow managers to both set and meet performance goals, within the parameters of set compliance and guidelines.
Managers can see exactly how and where they have succeeded and fallen short. And real-time alerts of changing market conditions can allow rapid trades. But beyond that, there are important features that will break measurement down in many ways:
- Yield and return measure over any period of time, for a specific portfolio, groups of portfolios, etc.
- Allocations and returns are broken down by sectors, asset types, portfolios, etc.
- Portfolios can be grouped by any factors in order to track performance over any period of time.
- Tools that provide risk analysis, tracking based upon histories, and blended rate comparison.
- Analytics that allow managers to analyze their positions in a variety of ways in relation to a variety of yield curves. Performing these yield-curve analyses should be automated and far simpler because data from a portfolio does not have to be off-loaded to some external system.
Portfolio managers want ease of reporting capabilities, even when those reports may be complex. They want historical, current and projected activity and positions. These are key elements of portfolio analytics. Any reporting engine should be able to turn any query into an immediate report which can then be “massaged” for individual needs. Features that support this will be the following:
- Design tools that can add fields, identify specific groups, and have reports graphed immediately
- Customization of reports based on specific criteria and filters.
- Reports can be outputted to several optional formats and can be emailed to multiple recipients.
- Reports of projected activity can provide risk levels and be forwarded to clients for their input.
Software Development for Financial Risk Management – It’s Complex
Given all of the four categories of portfolio management systems, it is difficult to see how a single software package can do it all.
And yet it can, if the right software developers are found who know how to develop a trading risk management system based on the latest trends in fintech technology and data science.
Consider all that such software can do for a portfolio manager who wants to provide the best wealth management services to his clients:
- He can use data on the history of funds to predict the value of allocating some money to those funds.
- He can use data to analyze trading futures.
- He can identify the best hedge investments to offset potential losses in other allocations.
- He has real-time data to optimize swing trading risk management.
- He can utilize investment automation in real-time to maximize the potential for gains and stay within the limits of SEC, internal, and client parameters.
- He can conduct inventory analysis of one or multiple portfolios and conduct side-by-side comparisons, in order to make better recommendations. Indeed, the software itself can make those recommendations.
- He can develop short- and long-term investment strategies for his clients, based upon data, not upon “feelings” or “hunches” or “hot tips.”
Staying Relevant in a Disruptive Environment
Individual investors now have access to many of the same tools for investing that portfolio managers do. So why would they want to put their portfolios in the hands of someone else to manage?
The answer is that most individuals still do not want to take the time and make the effort to do it themselves.
And yet, they are very fickle. If they believe that an investment management company is not meeting their needs, they are quite likely to take their business elsewhere.
The wise investment enterprise will look for financial planning solution development for its financial advisors in order to provide services through the latest technological advances. This means that it will seek portfolio risk management software, either from a vendor that offers SaaS/cloud solutions or through custom development that will provide all of the unique functionality it needs.
At Romexsoft, we believe that a custom solution is the best answer. We will discuss your specific needs for portfolio risk management, relative to the key 4 features that have been outlined above, and assign a team of investment software development experts with vast experience in investment risk management in this age of big data. Let’s talk about what we can do for you.
Written by Romexsoft on September 21, 2017