Used by rival fund managers, BlackRock’s Aladdin platform links investors to the markets, ensures portfolios hold the right assets and measures risk in the world’s stocks, bonds and derivatives, currencies and private equity.
Vanguard and State Street Global Advisors are users, as are half the top 10 insurers by assets, as well as Japan’s $1.5 trillion government pension fund, the world’s largest. Apple, Microsoft and Google’s parent firm, Alphabet all rely on the system to steward hundreds of billions of dollars in their corporate treasury investment portfolios.
Today, $21.6 trillion sits on the platform from just a third of its 240 clients, according to public documents verified with the companies and first-hand accounts. That figure alone is equivalent to 10% of the world’s stocks and bonds.
Rob Goldstein, chief operating officer for BlackRock, says Aladdin’s risk tools are designed to support, rather than replace, portfolio managers, adding that rival platforms offer an alternative, negating the idea the financial system was overly reliant on Aladdin. “Even though it’s a critical piece of infrastructure, there are many critical pieces of infrastructures that clients have in their inner workings,” Goldstein said to the Financial Times. “We live in an incredibly competitive environment.”
Competitors are fast developing rival platforms that are taking some of its business. The system’s scale — unparalleled for technology offered by a fund manager — has also created possible conflicts of interest. Most of all, its importance as a fintech hub has raised the prospect of a regulatory backlash.
In January, UK regulator FCA said the failure of a large portfolio and risk system, like Aladdin, “could cause serious consumer harm” or even “damage market integrity”.
“The industry is becoming reliant on a small number of players such as Aladdin,” says Jon Little, former head of BNY Mellon’s international asset management business, speaking to the FT. “Yet [regulators] seem reluctant to regulate or intervene to supervise these key service providers directly.”
Though Aladdin does not tell asset managers what to buy or sell, some argue that if a large portion of global assets respond to the warnings that Aladdin gives off, trillions of dollars will react to events — such as the outbreak of a pandemic or war in the Middle East — in the same way, causing dangerous herding behavior. The more investment managers and asset owners rely on Aladdin to gauge risk, the less responsible they become for their portfolio decisions.
This concern was highlighted by the Los Angeles County Employees’ Retirement Association, the $58 billion US pension fund, in January. It cited the potential for “groupthink” as one reason it declined Aladdin’s risk capabilities. “Anything close to an oligopoly in risk management would be especially dangerous if there were any weakness in the system,” says Jim McCaughan, former chief executive of Principal Global Investors, the $476 billion fund manager, to the FT.