Rafet Eriskin of AP4: The Digital Revolution in Asset Management [3 of 5]

Today I continue my series born from conversations with Rafet Eriskin, Senior Portfolio Manager at AP4. In the first installment, we observed how Rafet’s method of selecting managers drives better diversification and returns. In the second, we examined AP4’s truly unique history regarding manager transparency.

Over the past few years, Rafet has monitored AP4’s portfolio of hedge fund investments with daily, position-level data. Because of the minimal lag in receiving new information, Rafet looks at each portfolio as if he were the manager herself or himself. Monitoring a highly sophisticated, high-turnover, data-intensive portfolio might seem like a job for an army of analysts. Instead, Rafet does it part-time, and he’s alone. This wasn’t the case before partnering with Novus. In fact, Rafet recounted to me how just staying on top of the portfolio took a team of four people. As data was flooding in and the team was rushing through lines of code to make sense of it, Rafet sensed there must be a better way. That’s when he seriously decided to investigate a more scalable and digital approach.  

Helping investors succeed by improving the technology involved their processes is part of Novus’ very DNA. Novus has served Rafet with portfolio intelligence solutions since 2015. At the risk of sounding self-aggrandizing, this article discusses the digitalization chasm present in our industry, and the opportunity for investors who bridge it.

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Asset Managers Are Falling Behind

The finance industry was born as an industry of numbers, and yet, paradoxically, it’s been one of the slowest to embrace the digitalization wave—at least so far. Asset managers ranked 24th out of 34 industries surveyed in a Morgan Stanley research study.

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Source: Morgan Stanley Research estimates

Along the same lines, Willis Towers Watson concluded in its 2018 Global Pension Assets survey that “the technology impacts on pension funds have been surprisingly light as evidenced by legacy systems that rely heavily on spreadsheets.”

Why is this? Likely because returns and margins have been so high for so long, nobody had to worry. Rafet adds, “Now that the tide has turned, and pressure mounts on returns, costs, fees, we need to look to technology to move forward.”

The rising amount of data made available to investors, and the increasing effort it takes to put it all in one place is also a factor. This was particularly relevant for Rafet, “We had started to receive position-level data (which was our mission all along) but we were finding ourselves coding stock-split in the system in order to reflect proper attribution. I lifted my head and realized we were spending time on things that had nothing to do with my job as investor.”

Rafet also feels that there is a natural, human resistance to change, because “the democratization of coding skills makes everyone think they can solve these problems by themselves.” While true in principle, we tend to underestimate the effort it takes to make things happen. “Let’s not forget we’re investors, not computer scientists,” muses Rafet. Additionally, expectations around navigating technology have risen so much that, as he told me, “a Python script spitting out a PDF report just won’t cut it.” Now everyone wants a responsive, interactive, and pleasant user experience—something our smartphones have irreversibly accustomed us to expect.

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AP4’s Digitalization Journey

As mentioned, Rafet started with a team of four individuals (including himself) to monitor the hedge fund portfolio. Of these, two were full-time engineers devoted to coding analytics and automating data management work.  

After establishing electronic data connections with the books and records of AP4’s hedge funds (we skip the details here for confidentiality) and matching it with balance and transaction data from AP4’s custodian, Rafet automated nearly his entire process. As of today, monitoring the hedge fund portfolio only requires about half of Rafet’s time.

What was the impact on manager relationships? “That’s another misunderstood aspect,” observes Rafet, “Some managers still think that sharing transparency invites more questions, and exposes the manager to the risk of IP theft, which is fully irrational.”

Rafet continues, “There are many positives to what happened: we now have deeper, more meaningful conversations, and we don’t have to lose time getting on the same page.”

The opportunity for efficiency is tremendous. Imagine the aggregate value added on both sides—for managers and allocators—when investor conversations happen based on a common set of facts that are easily understood, centralized, and beautifully visualized. This is a recipe for successful conversations, better relationships, and smarter investing.

Rafet shared that there have been a few interesting surprises with this new way of interacting as well. For example, during one review meeting, Rafet shared an insight provided by Novus that the manager was unaware of. The manager was intrigued, validated the hypothesis via further analysis, and started turning the portfolio to reap the benefits. “It was useful for them, and for us in return of course,” recounts Rafet, “You could not have wished for a better outcome.”

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View Part 1 of this series, Selecting Managers

View Part 2 of this series, The New Transparency

View Part 4 of this series, Investor Bias

View Part 5 of this series, Simples vs. Complex Models‍