Doubling Down on Derivatives

Terry Flanagan

Buy side institutions are intensively focused on technology for processing complex derivatives, devoting internal and their external IT spend to the effort.

Jim Keohane, president and CEO of the Healthcare of Ontario Pension Plan (HOOPP), makes the case for an advanced investment management system to drive derivatives processing and power the liability-driven investment model of the leading Canadian pension fund.

“In the constant search for alpha, we see more and more investment management firms including derivatives in their investment programs,” Keohane said in a report. “Adding these complex instruments to the portfolio puts demands on accounting and settlement processing, and presupposes a suitable and sophisticated technology infrastructure.”

HOOPP deploys a range of derivatives, including futures, options and swaps to generate an excess return rate on its investments.

Serving as the main provider of pension services to the Ontario healthcare sector, HOOPP has risen to become the largest private pension fund in Canada with assets under management of $50 billion.
For several years, HOOPP has implemented a liability-driven investment (LDI) strategy with technology-enhanced derivatives structures playing a pivotal role.

At staff of about 40 run hedge-fund strategies, such as equity long-short, credit long-short, and index arbitrage.

“It became increasingly clear to us that our existing portfolio management and accounting system would not support the types of activities we wished to undertake,” said Keohane. “What we needed was a portfolio management and accounting system that could handle all the various investment products we wanted to employ.”

HOOPP ended up implementing the SimCorp Dimension investment management system. “It is able to support HOOPP’s complex derivatives book, all existing instruments as well as potential ones,” said Keohane.

With regard to risk management, the SimCorp platform helps HOOPP with sophisticated modules to run daily risk reports reviewing exposure to credit, liquidity, and counterparty credit.

“With the amount of investment knowledge doubling every four years, firms should not rely on technology that may be decades old,” said SimCorp’s David Kubersky. “Taking on a modernized IT system is an exercise in risk mitigation and also growth. In today’s IT-driven world, technology is a powerful enabler to drive alpha. In fact, studies show that operational efficiency directly contributes to investment performance.”

Separately, Numerix, a provider of cross-asset analytics for derivatives valuations and risk management, has upgraded Numerix CrossAsset, its flagship analytics framework for structuring, pricing and managing the risk of any derivative.

The Universal Local Stochastic Volatility Model with Jumps (ULSVJ) helps to make pricing and risk tools for semi-exotic derivatives such as barrier options more accurate and robust in terms of performance.

This functionality is sought after by many buy-side and sell-side firms, proving especially impactful for market makers, or those who trade with market makers in semi-exotic FX and EQ options.

Sophisticated hedge funds can also leverage the new model to match the market prices in these options as nearly instantaneous calibration is possible.

“The development team continues to move Numerix CrossAsset forward with modern models and methods, ensuring that our product stays ahead of the curve and continues to be the best commercially available analytics library in the market,” said Steven O’Hanlon, CEO and president of Numerix “We have also put a great focus on ensuring that the Numerix model library and pricing architecture can scale in enterprise risk systems, and we continue to allocate much strategic bandwidth in this area.”

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