Sweden's IPM Taps DataArt to Build Pre-Trade Risk Analysis System

Swedish hedge fund Informed Portfolio Management (IPM) has outsourced development of a key pre-trade risk management system to New York-based DataArt as part of a broader relationship with the development shop.

IPM’s decision to farm out development of the risk platform to DataArt – one of four projects that the developer is currently undertaking for the firm – also appears to underscore a recent willingness particularly among alternative investment firms to outsource IT tasks.

Earlier this year, for example, SphereInvest turned to London-based Formicary for help in deploying and managing its trading and risk management platform as part of its Hedge Fund in a Box offering (Risk-Technology.net, February 2011).

Like IPM, many financial institutions are looking outside of their own staffs for help in deployment of new risk, compliance and other systems designed to address the deluge of incoming regulatory requirements. By outsourcing IT development across a broad range of functions, these firms are seeking to ensure their own IT infrastructures are lean and agile enough to quickly respond to regulatory change while keeping costs in check.

DataArt has completed development of the portfolio risk management and scenario analysis system at IPM, which has some $8 billion under management mostly for pension funds, sovereign funds and other institutional clients. The firm provides currency management, equity management, and commodity and multi trading strategies.

According to Anders Lindell, Executive Vice President at IPM, the firm had decided to seek outside help to address scalability issues for its largely proprietary trading and investment set-up. “We wanted to modernise our in-house systems to ensure a higher degree of stability,” he says. “We had a choice: rebuild ourselves or use professional help. The choice is obvious for a project like this.”

IPM engaged DataArt after finding the company through an Internet search and a subsequent multi-vendor screening process. Although, being based in Stockholm, IPM was “outside of our reference circle,” says DataArts EVP Alexei Miller, DataArt's offshore development facility in St. Petersburg proved to be a plus, providing relatively close proximity to IPM’s headquarters and data centre.

DataArt was employed to finalise the development of a risk management system designed to calculate risk and provide portfolio exposure metrics for several strategies and asset classes, including currencies, commodities and equities. The company developed a Web-based application that calculates various portfolio risk measures such as VaR (value at risk) metrics and exposure for the different types of accounts managed by IPM. The pre-trade risk controls developed by DataArt operate in a Microsoft .Net environment located in a staging configuration within IPM’s data centre, and make use of Microsoft’s SQL Server.

Based on modern methodologies, the risk management system does pre-trade risk modeling and approves recommended trades for each of the client’s accounts. To ensure regulatory and contractual compliance, the system can run back-tests on the current portfolios using an extensive array of historical market data and calculate the tracking error for each portfolio. This functionality is crucial for the hedge fund operation, as per-account risk budgeting is a strict requirement by IPM’s larger institutional clients.

According to IPM’s Lindell, “DataArt's proven expertise with building front to middle integrated solutions and, specifically, model calculations was crucial for building a robust risk mitigation system we had envisioned in a timely manner.”

Miller is also quick to stress the importance of clarity around intellectual property rights. He says DataArt provides custom development and all work is the property of the client. This is particularly important for firms’ mission-critical applications, he says. “They don’t want to see code showing up somewhere else.”

DataArt delivered the risk management tool in full compliance with project requirements.  The application is currently used by IPM to manage assets on behalf of some of the largest European pension funds, major asset management firms, and banking institutions.

“We managed to optimise time to market for IPM thanks to efficient knowledge transfer and onsite collaboration with the business stakeholders,” says Alexander Makeyenkov, senior vice president of capital markets at DataArt.

Makeyenkov confirms the need among asset managers, which often lack significant internal IT resource, to respond quickly to emerging regulations. “In the post-crisis landscape, we see strong recovery signals in the asset management space,” he says, “and the new regulations only add more requirements to software initiatives that have been frozen for the last few years. The time-cost saving attribute of service is crucial today, and that’s why DataArt has an attractive proposition for buy-side clients: we offer expertise in serving financial clients with a hybrid of onsite/near-shore delivery model.”   

IPM extended its engagement with DataArt into 2011 to customise some of its current risk management solutions, including integration of the existing market data systems with an additional third-party risk management system.