Personalizing & Securing Alternative Investments through SMA Platform

Executive Summary

Alternative assets are mainly accessible to investors through commingled vehicles, which often suffer from low transparency, high friction, and low control. After studying the operational challenges of commingled vehicles and the poor investor experience, we recommended a separately managed account (SMA) structure to allow individual investors to build customized portfolios and retain full control over their assets. Investment managers can leverage technology to manage hundreds of SMAs with consolidated trading, portfolio management, reporting, and rebalancing. Implementation involved using Java language, Spring Boot framework, microservices architecture, SQL Server database, AWS Elastic Beanstalk and EC2, RDS by AWS, Node.js for client integrations, and React.js and Redux for the frontend.

Client Background

The client operates in the alternative asset investment space, where investors primarily access investments through commingled vehicles. These vehicles are known for their low transparency, high friction, and low control, leading to operational challenges for investment managers and a poor experience for investors.

Problem Statement

The client sought a better solution to address the operational challenges of commingled vehicles and improve the overall investor experience in alternative asset investing.

Objectives

Our objectives were to:

1. Analyze the operational challenges of commingled vehicles and the investor experience.
2. Develop a more efficient and transparent investment structure.
3. Implement technology solutions to facilitate efficient management of the new investment structure.

Approach

We took the following approach to achieve our objectives:

1. Conducted a thorough study of the operational challenges of commingled vehicles and the investor experience.
2. Recommended a separately managed account (SMA) structure to enable customization and investor control.
3. Developed a technology solution to manage multiple SMAs with consolidated trading, portfolio management, reporting, and rebalancing.

Key Findings

Our analysis revealed that commingled vehicles created operational challenges for investment managers and a poor investor experience due to low transparency, high friction, and low control. The separately managed account (SMA) structure provided a more transparent and investor-friendly solution.

Recommendations

We recommended the following actions:

1. Adopt the SMA structure for alternative asset investing.
2. Develop a technology solution to manage multiple SMAs efficiently.
3. Implement consolidated trading, portfolio management, reporting, and rebalancing capabilities for SMAs.

Implementation

We built a custom solution for the specific use case and used our recommendations and key findings to guide the product design and implementation. With multiple users in the user experience, it was important to include tight feedback loops in the development and implementation phases.

Technology Stack

Our team used the following technologies for the implementation of the SMA structure and the technology solution:

1. Java language for backend development: Java is a versatile, object-oriented programming language that is widely used for enterprise-level applications. We chose Java for its robustness, portability, and extensive ecosystem, which allowed us to develop a reliable and secure backend system.
2. Spring Boot framework for the application infrastructure: Spring Boot is a widely used framework that simplifies the development, deployment, and management of Java applications. We used Spring Boot for its ability to quickly create stand-alone, production-grade applications with minimal configuration and a wide array of available modules and integrations.
3. Microservices architecture for scalable and modular design: Microservices architecture is an approach to designing and developing applications as a collection of small, modular services. This architecture allowed us to create a scalable and flexible solution that could be easily maintained and extended as needed.
4. SQL Server database for data management: SQL Server is a powerful and reliable relational database management system from Microsoft. We chose SQL Server for its robust features, high performance, and compatibility with the Java and Spring Boot ecosystem.
5. AWS Elastic Beanstalk and EC2 for deployment: Elastic Beanstalk is a fully managed service that automates the deployment, scaling, and management of applications, while EC2 is a scalable virtual server in the AWS cloud. These services enabled us to easily deploy and manage our application infrastructure while maintaining control over the underlying resources.
6. RDS by AWS for database deployment: Amazon RDS is a managed relational database service that simplifies the setup, operation, and scaling of databases in the cloud. We used RDS to host our SQL Server database, which provided us with automated backups, monitoring, and scaling capabilities.
7. Node.js for client integrations: Node.js allowed us to create lightweight and efficient server-side JavaScript applications to handle client integrations, such as communication with external APIs and data processing.
8. React.js and Redux for frontend development: We utilized React.js for its component-based approach to building user interfaces, providing a fast and responsive user experience. Redux helped us manage the application state more predictably and consistently, ensuring a seamless and efficient frontend experience for the client’s employees.

Results

The implementation of the SMA structure and the technology solution led to increased transparency, reduced friction, and improved control for investors in alternative assets. Investment managers were able to efficiently manage multiple SMAs with consolidated trading, portfolio management, reporting, and rebalancing capabilities.

Operational Efficiency

Reduction in time required for trading, portfolio management, reporting, and rebalancing. Average Processing Time decreased by 20% by reducing manual switching between different custodians.

Transparency

Better transparency of portfolio, by increasing reporting frequency from monthly to daily.

Cost Reduction

Reduced fees and lower operational costs, because one solution now to manage all investments on different custodian accounts, resulting in and average of 5%-10% costs of trading.
For internal purposes, efficient management of operational costs as no various platform required for calculations and reporting.

Client Integrations

3 external client integrations successfully completed using Node.js. This shows the platform’s capability to integrate with various external systems and APIs.

Conclusion

The adoption of the SMA structure and the implementation of the technology solution effectively addressed the operational challenges of commingled vehicles and significantly improved the investor experience in alternative asset investing. The result was a more efficient, transparent, and investor-friendly approach to managing alternative assets.