The Art of Cutting Corners

I enjoy brewing my own beer. I make small batches in my kitchen that produce a gallon each. Because I already have most of the necessary cookware, all I need to buy are the ingredients, which amount to about $25 dollars per batch.

Sometimes if I’m brewing something intricate, I’ll put in the extra effort and do everything by the book, but that becomes far more time-consuming. But more often, I just throw everything into a nylon sack and cook up the mash. Bada-bing, bada-boom—all done.

Usually the result is excellent. Sometimes it’s good enough. Every so often, it’s terrible. But even if it’s bad, it’s only a gallon, which ends up being less than a 12-pack, so it’s no big deal throwing it out and starting over.

So what does this have to do with financial technology? Glad you asked.

This week, buy-side vendor SimCorp put out a survey where 82 percent of 135 respondents said that they have to create workarounds in the middle and back office to support their derivatives business. They choose this route, rather than consolidating into one system with all of their asset classes under one environment, which would make it easier to model and launch new products, and it would make it more efficient for client reporting.

They feel that even if it goes awry, they’ll only have to throw out a gallon of beer. No big deal.

Workarounds are attempted shortcuts to save on having to put in the time and cost of implementing a new platform that can bring together all these assets under one roof. Now, I think that everyone would agree that having one, true platform is best, but clearly—as this survey would attest to—using different platforms for different assets is just easier, even if not better.

So in this convoluted analogy, my beer making supplies—the jug, thermometer, nylon sack and pots and pans—are the “infrastructure”. The ingredients are the “models” that will help to create a new beer or, in this case, a new “derivatives product”. My cutting corners and just throwing everything together is the “workaround”.

Unlike at hedge funds, my workarounds don’t really help me save money and they don’t add time to the project—actually it’s just the opposite, as it can cost less and it is a lot quicker to make. But I do it mainly because the undertaking that is involved in doing everything by-the-book is significantly heftier.

Now, back to the survey: Eighty-two percent of these respondents are choosing to employ workarounds; 57 percent said that it takes them two or more months to model and launch a new product, when a couple of weeks would be ideal; and 34 percent admitted that because of their workarounds, client reports were compromised. (And that number is likely higher, as some respondents were likely a bit wary of being honest, even on a blind survey.)

What does that tell us? They are a bit concerned about their workarounds and they know that things can go wrong, but they still employ these workarounds because it’s easier and they are willing to take the risk that things will turn out okay. They feel that even if it goes awry, they’ll only have to throw out a gallon of beer. No big deal.

To be sure, the same can be said of firms that use Excel spreadsheets to manage client data rather than investing in an automated system. There’s a reason why firms do this, even if it’s risky. To be honest, I can’t say they’re entirely wrong. Yes, improper risk and data processes and controls have felled many a hedge fund or asset manager, buy sides aren’t collapsing every week because of this, either. They understand that as technology is concerned, just as in their investments, this is a risk/reward industry.

It may not be politically correct to say, and you can be sure that no hedge fund manager would ever admit to this on-the-record, but sometimes workarounds are better—as long as you don’t ever produce a skunked batch that gives everyone food poisoning.