Finance:Productivity Alpha

The term productivity alpha describes above benchmark productivity resulting from operations that have been optimized through the use of technology.

Productivity alpha is essential to helping today’s asset management organizations remain competitive. It leads to cost savings, increased efficiency and a more satisfied work force.

Background

Alpha is a word used in the investment process. A positive alpha means that a fund has performed better than the benchmark or better than average.

There is a direct correlation between a firm’s operations and productivity. When operations are automated and operational processes are streamlined, productivity increases. This can help a firm to see a significant improvement in their overall business. Well-run operations will, in fact:

• Enable the front office to address new sources of alpha
• Protect the generated alpha
• Minimize the cost of operations
• Provide accurate and transparent information to investors

By allowing the asset manager to execute his or her investment strategy faster or smarter, the operations can have a direct impact on the fund’s alpha.

Highly automated and efficient operations enable a firm to more quickly accommodate new instruments, strategies and markets, thus directly contributing to the development of new sources of alpha.

By avoiding errors and delays in operations the COO helps to protect the alpha that the fund manager has created. Errors in the middle or back office can result in additional costs for reversing trades or even penalties. Furthermore, inadequate technology can increase an organization’s risk exposure. Operations which are tightly and efficiently managed can contribute to the protection of investment alpha.

By being more efficient in operations, an organization can reduce the cost of operations, directly benefitting the fund or the asset manager’s P&L. Every dollar spent on administrative expenses is a dollar less in additional revenue performance. In order to create and protect alpha, you must be able to reduce expenses and streamline processes.

By leveraging efficient operations for enhanced client service and reporting, an organization can spend more productive time with its clients. Investors today demand accurate and well-presented information in a timely manner. This requires that operational processes and systems be aligned and skillfully managed to successfully feed downstream reporting applications and produce credible investor reports. Clearer reporting and increased transparency enables a higher quality and more satisfying client interactions, and directly contributes to the productivity of client-facing staff in both the front and back office.

The role of technology

Technology is essential in helping to optimize operations and increase productivity. The strategic deployment of technology allows investment firms to manage complexity, increase efficiency, and reduce costs and operational risk. Technology also enables investment firms to respond to changing business and regulatory requirements such as Dodd-Frank Act, UCITS and MiFID. In TowerGroup’s report on the Top 10 Technology Initiatives for 2011, it is predicted that the areas that will see the most technology investment in 2011 will be risk management, compliance, data management, analytics, and reporting.