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Portfolio and Risk Analytics – Mitigating the Operational Risks of Excel
By Rob Garfield | July 10, 2018

Excel remains a vital tool in buy-side trading and risk management operations. Try to pry it away from anyone who analyzes data in any capacity, and you may very well lose your hand. But the fact is that long-running compliance and operational issues with Excel continue to plague buy-side firms. 

Traditionally buy-side portfolio and risk managers have relied on Excel-based solutions to gain the flexibility they need in risk modeling. However, as many of us well know and have experienced firsthand, there are inherent risks with this approach. 

One of the risks with Excel is that it is very difficult to manage usage, and tracking changes to critical models is challenging at best. Formulas can be corrupted, changed inadvertently or changed for a good reason—but in all cases, auditing and regression testing those changes can be extremely difficult to manage. 

This isn’t just a compliance issue, but an operational one. Excel changes, for example, were at the heart of the London Whale, a clear example of the operational and market risks that still remain with Excel-driven solutions. So while Excel will inevitably remain a tool for investment managers, it should not be the only tool, as its utility as an enterprise risk system is limited. 

Below is a chart from Greenwich Research Associates relaying findings on the biggest risks of Excel, as reported by surveyed buy-side respondents. You’ll see that limited integration is the largest challenge (72%), with issues surrounding compliance oversight a close second (68%). Not far behind, both at 64%, buy-side respondents also reported difficulty tracking changes, and challenges brought about by employees leaving the company including the loss of knowledge that may bring. 

So how are firms minimizing the risks of Excel? Well, many are choosing to upgrade their technology. Realizing that building in-house is expensive, time-consuming and a bear to maintain, firms are exploring solutions from third-party trading and risk tech providers. 

While building in-house software is expensive and Excel is hard to manage, a major driver for the increasing willingness to buy third-party systems stems from the quality of available offerings. It’s therefore a welcome advancement that the level of customization in today’s off-the-shelf solutions is so high that any fear of losing a competitive edge for using “what the other guys have” is no longer viable.

 Seeing is believing, and it’s clear that now more firms than ever are realizing the many benefits of upgrading to best-of-breed risk management systems. But don’t to take my word for it, recent Greenwich research also showed that a whopping 77% of buy-side professionals surveyed said they are either upgrading (33%) or evaluating solutions to upgrade (44%) over the next 6-12 months.  

Interestingly, the key reasons for making changes to their technology were to: eliminate manual processes (55%), improve flexibility and customization (45%) and to reduce costs (43%). 

Today the Holy Grail of risk technology is a single, integrated workflow that allows execution, order, portfolio and risk data to flow seamlessly around the platform, to help all participants at any stage of the investment process. 

This could be a single system from a single provider, although very few are successful jacks of all trades. It’s more likely to be a combination of the best in the market, tightly integrated via both a unifying desktop experience and free-flowing data between platforms on the back end. None of this is easy, but is completely doable, and the returns surely justify the investment. 

To learn more, download a complimentary copy of the Greenwich Study: Developments in Buy-Side Risk Technology