The deal, which stemmed from a relationship between Eric Busay, portfolio manager at CalPERS, and Dr Arun Muralidhar, chairman and head of research at M-cube, a privately funded company headquartered in Plano, Texas, will see CalPERS using the software to manage its currency exposures.
Eric Busay, who helped seed the idea for the AlphaEngine and was a beta client, said: “Currently we are implementing an innovative currency programme and AlphaEngine gives us a structured framework for evaluating our strategic and tactical currency decisions.”
“This gives us the ability to pro-actively monitor the risk/return of our investments and dynamically manage our portfolio. The principals of M-cube have built a complex software with a very easy-to-use front end,” Mr Busay added.
The multi-asset aspect of AlphaEngine allows end users to analyse the performance of internal and external management. With the latter this can be undertaken individually or as a group using proprietary risk-adjusted performance measures. Clients can customise analyses to their specific internal portfolio structure, benchmarks and policy constraints and perform “what-if” scenarios using a dashboard that tells users when it’s a good time to reduce allocations currencies or stocks.
“One can not only look at the performance of external managers but combine it with some internal decisions that you could be making within your own fund as well,” said Dr Muralidhar.
 | Muralidhar: this is the software I wished I’d had when I was at the World Bank |
He added that information can be gleaned about whether it is appropriate to be adding or reducing external managers and/or increasing the risk represented by different managers.
To date, M-cube has attracted 11 clients from around the US and Canada to the Netherlands and the Middle East to its AlphaEngine software. Besides equity, fixed-income and multi-asset portfolios, the system can also be used for private equity and property portfolios.
One of the earliest adopters was PME, the ?16bn Dutch metalworkers’ fund. In the US, the Virginia Retirement System, a $40bn fund, is another user.
AlphaEngine, which was launched in 2004, can be used not just by pension funds but asset managers and hedge funds of funds too. “One of the problems that you are faced with when you are managing money is the ability to quickly and transparently test good ideas,” said Dr Muralidhar. How do you put these ideas together in a portfolio? That was the spark for developing a technology that allows anyone who manages money to test an idea in a few minutes.”
Gauging whether a trend is developing beyond the Calpers deal, Dr Muralidhar stated: “Absolutely. We are currently talking to clients in Japan, Switzerland, the US and Canada. Essentially what has happened is that is that many pension funds have been dependent on asset managers to provide them the solution…now we’re empowering and at relatively low cost.”
While some clients use it for their entire pension fund and some just for currencies, the software can be “tweaked” by the user for bespoke purposes.
“The whole idea was to develop a very easy to use web-based technology to empower managers to make better decisions themselves - without having to rely on outside third parties or hire large research teams.” Ideas about portfolios structure or external managers are tested and shown transparently to management.
Pricing is based on usage of the application as it is an applications service provider (ASP) model and also because of the customised nature of each user’s set-up. With CalPERS, use is limited to currency, while the San Bernadino County Employees Retirement System deploys it for additional functions.
“San Bernadino uses it to make smarter decisions about re-balancing moves. During 2005, they were able to make a number of sound decisions that added meaningful value,” noted Dr Muralidhar.
Cost savings for end users are said to be “significant.” Dr Muralidhar explained: “What used to take me 10 minutes to complete is now a two minute exercise. When I managed a pension fund I would have to engage in [mundane] Excel programming to test investment ideas.
“We are also saying that someone running a pension fund should firstly be thinking of investment ideas - not doing Excel spreadsheets – thereby making the focus of the investor really powerful. It’s the software that actually helps them improve the investment process.”
For Dr Muralidhar, it’s the product he “wished” he’d had when he was managing $10bn of the World Bank’s pension fund as a member of their investment committee. “But it took me a number of years to realise what was going on in this industry and what the challenges were to actually build that out,” he concluded.
RA
