Buy-side Investment Technology in Digital Assets: Platform vs. Best-of-Breed

Patrik Kohli
February 14, 2024
5 min read

Buy-side Investment Technology in Digital Assets: Platform vs. Best-of-Breed

In the context of our partnership with Deutsche Börse's SimCorp, we aim to zoom out and shed some light on two prevailing approaches to investment technology. We argue that the technology approach chosen by buy-side participants will likely follow a similar trajectory in Digital Assets as it did in Traditional Finance (TradFi) over the past decade: transitioning from in-house built tools to best-of-breed combinations, and ultimately moving to integrated platforms. Although we're inherently biased (building an integrated platform), we provide some background as to why we believe the majority of buy-side firms will ultimately adopt integrated solutions in the long run. This view was also a key driver in our earlier conversations with SimCorp, who has risen to become one of the largest and most important players in the TradFi investment technology space. At Alloy, we are committed to this integrated platform approach, actively seeking partnerships and seamless integration to enhance the digital asset space.

A Brief History: The Evolution of Investment Technology

Investment management technology has undergone significant transformation over the past decades. Initially, the focus was on developing in-house tools tailored to specific needs. Some of it was out of necessity - there simply were no such products to buy off the shelf, so investors built their own. However, as the complexity and scope of asset management grew, an industry around investment technology emerged. Buy-side firms started to recognize the benefits of buying a product from specialized technology providers. Adopting the “best of the best” or so-called best-of-breed approach was a natural progression. This approach, though providing superior capabilities in specific areas, often led to a fragmented technological ecosystem, challenging in terms of integration and efficiency – from the harmonization of different data structures to orchestrating a range of development cycles and API updates. Transitioning to integrated platforms emerged as a solution to these challenges. These platforms offered a unified environment, combining various functionalities like portfolio management, risk, post-trade, accounting, and compliance into a single, cohesive system. The shift towards platforms has been particularly notable among larger asset managers, who value the streamlined operations and comprehensive nature of these systems, even at the expense of a few very specialized functionalities that might be missing. Alloy Capital's platform embodies this shift, offering a holistic solution to the fragmented digital asset technology landscape.

Best of Breed vs. Platform Approach in Traditional Asset Management

If TradFi is an indication of where things are headed, then the best-of-breed vs. platform learnings may provide interesting insights for buy-side firms focusing on, or extending to, Digital Assets. While in-house or best-of-breed approaches, i.e., focusing on building or selecting the best system for each specific function, have their merits in customization and specialized capabilities, they often come at the growing cost of higher complexity in integration and operations over the long run. In contrast, the platform approach provides an all-encompassing solution, ensuring smoother interoperability, lower total cost of ownership over time, and a unified user experience, albeit with potential functional limitations in certain specialized use cases. Alloy's platform approach in digital assets is a testament to this evolution, offering scalability and integration that are vital for managing complex digital asset portfolios.

Digital Assets: A New Frontier for Investment Technology

In the Digital Asset space, the technological landscape is still evolving. Many investment managers find themselves in a dilemma between developing custom tools and adopting specialized third-party solutions that, in many cases, have either not been purpose-built for investment management (such as wallet providers or accounting platforms) or not been built for Digital Assets (such as an FX trading system). Therefore workarounds and tweaks are needed for them to be somewhat useful. The complexities and opportunities of the asset class extend further and therefore require appropriate technology to manage them. This challenge has led to a heterogeneous mix of technologies, with asset managers often relying on multiple tools that require significant in-house integration efforts, and often need to be enhanced with in-house built solutions (yes, this includes spreadsheets). Alloy's integrated platform addresses this challenge by providing a scalable, robust, and purpose-built solution for digital asset investment management.

The Challenge of Scalability and Integration

In TradFi, as the investment management industry matured, the preference shifted towards platforms, due to their ability to provide a holistic solution, simplifying technology stacks, and reducing operational redundancies – which ultimately feeds into one key aspect: Scalability. This requires a long-term view, especially from a pure business perspective instead of an investment perspective. As digital assets grow in variety and complexity, the need for scalable and integrated technology solutions becomes critical. Managing millions or billions in outside investor money requires a robust, efficient, and professional setup (no, this does not include spreadsheets). Therefore, we firmly believe that the platform approach, proven in traditional investment management, is increasingly relevant in the Digital Asset space. A platform-based solution offers a comprehensive view of assets, streamlines operations, and ensures scalability as the market evolves. Alloy Capital's platform is designed to meet these evolving needs, ensuring that buy-side firms are equipped with the right tools to manage digital assets effectively and at scale.

A Few Words on Generating Alpha

Alpha can be generated in many ways. Technology is one way. From fundamental, research-based strategies to short-term trading and high-turnover, high-frequency approaches - they all rely on technology in the end. However, the degree to which it contributes to it, is the source of it, or just a way of not losing it, varies. One consistency, though, is that a robust, best-practice investment process can be greatly enhanced with the right underlying technology platform. This is where we believe the Digital Asset buy-side can leverage the learnings in TradFi and use platforms that strip away complexity and operational burdens to greatly enhance clarity and allow them to focus on what they do best: Generating returns for their clients. Alloy's platform facilitates this by offering a streamlined, efficient approach to digital asset management, allowing clients to focus on generating alpha while the platform handles the complexities of the digital asset space.

Looking Ahead

As the Digital Asset market continues to mature, we anticipate more solutions to enter the market. However, having learned from the technology evolution in TradFi, buy-side firms will greatly benefit from using purpose-built, platform-based solutions that can deal with the asset-specific nuances as well as the underlying market infrastructure in Digital Assets. Finally, we fundamentally believe that the appropriate investment technology used by institutional investors is a key element in the growing professionalization of the asset class itself. We see investment technology as the “last-mile delivery” in Digital Assets: Blockchains, protocols, and a number of solutions that build on them, provide the infrastructure for this asset class to exist. Investment technology is what brings the assets from the infrastructure to the actual investors.