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CONTACT: Andrea Obston
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(860) 653-2712 (home)
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Alternative Investments are a Pain in the Back Office

PORTLAND, OR, Dec. 20, 2007 -- "I'm only a trade away from a problem." If you're managing a substantial backroom operation, this statement probably sends shivers down your spine.

The truth is that in today's competitive world, alternative investments are an important part of portfolios for institutional investors. And those alternative investments mean playing a constant game of "who's on first?"

"If you're trading for yield, you need to deal in new investment vehicles, and these new instruments are tough to keep track of," says business and technology consultant Doug Sheehan. "Today's investment manager has to include investments like derivatives, dollar rolls, bank loans, interest rate swaps, private placement bonds, mortgage-back securities, and more, if he or she expects to maintain a competitive advantage by getting a great yield. The problem is that these alternative investments are a problem for the back office because they are hard to keep track of."

Sheehan points out that in the old days, investment departments put their funds into T-bills, stocks and corporate or municipal bonds. All had predictable returns and systems were designed to keep track of them. "But," he says, "If you've got a product that requires foreign currency, and an interest rate of LIBOR plus 30 basis points, this is a whole a new kind of investment. You have to track variable rates, foreign currency rates, and track the credit risks. Keeping track of these kinds of items is often messy."

Furthermore if you don't get it set up correctly at the beginning, when the cash comes in, you may find that the income you forecasted doesn't equal the income you receive. This means someone's got to research and figure out why there's a difference. Another possibility is that one accounting regulation requires you to report something as a bond, while another says you need to call it a preferred stock. "That's why everyone in the back office is concerned about alternative investments. They are getting more popular with investment managers and more complicated to keep track of," Sheehan points out.

Sheehan says companies with assets of $50 billion or more are into alternative investments because of the great yields they can produce. Since they're competing in a marketplace where a few basis points make a big difference to their clients, they have to be good at it. As a result, they may have four or five hundred of these investments and keeping track of them with their current software or by spread sheet is not an alternative.

"Many of our clients believe that their current software can provide the necessary function to make these alternative investments manageable," says Sheehan, whose company, ICC, Inc., has been working with investment systems for 15 years. "'There ought to be an option in there,' they tell me. But even if the software came up with a patch to handle these situations, it may take a year or two to get it into production. The reality is that vendors are also overwhelmed with these new alternative investments, so they, too, are paddling as fast as they can to keep up. Furthermore, vendors only do new releases once a year and then these releases must be tested. So the best case scenario is that someone in desperate need of a system may be a year away from getting a solution implemented. If this particular kind of investment doesn't make it into this cycle, the solution could be two years away. And, if the vendor doesn't see it as a priority, it might never get in. Vendors do their best to keep up, but their solutions may not meet your timeframes. While you're waiting you may need an interim solution."

What about the investment manager's traditional interim solution - the spread sheet? Sheehan says managers are complaining that their spread sheets are failing to keep up, especially when numerous alternative investments are in play. "If there are only one or two alternative investments, the financial impact may be small, but if you have many, or if they are large dollar amounts, the impact is material. Keeping track of it manually, even temporarily, is impossible. Companies need help to develop an ongoing system to track these problems that are beyond the capability of spread sheets. You need to combine workflow and systems solutions."

This is an issue that requires a mastery of both a company's business and its technology. Systems vendors are masters of technology, but their expertise typically doesn't extend to business-oriented solutions. Sheehan's company, ICC, inc. develops workarounds in such situations. "What we've found to be particularly effective is a side system that helps clients handle alternative investments until their software 'catches up' or until they off-load the investment. It's like a bridge that safely gets investment managers to the other side, carrying their departments over the turbulent waters of alternative investments."

He summarizes the situation this way: "Alternative investments are a permanent factor in today's competitive environment. We expect they will get more complicated as managers seek to maximize their yields. Keeping up with them in a timely manner will continue to be a difficult but crucial matter."

About ICC

Doug Sheehan is president of Investment Conversion and Consulting, Inc.(R) (ICC). The company helps institutional investors implement investment management back-office solutions. ICC has been called the financial industry's "merger veterans", having created and put into play many of the best practices used today in investment accounting systems integrations. Since 1993, they have integrated the investment systems in some of the most high profile mergers in the industry. The firm also offers systems' consulting services support for the investment accounting and operations functions of major insurance companies and other institutional investors. They provide business analysis, technical analysis, software solution recommendation, vendor selection, and improved processes for management and operations. The firm's proprietary software tool, IRDB(R), enhances management and operations related reports for clients. For more information see www.iccinc.com

Media Contact

Andrea Obston (860) 243-1447 (office), (860) 803-1155 (cell),

(860) 653-2712 (home) aobston@aomc.com

For more information - contact ICC.