The story goes that in 1986 Larry Fink, the shooting star in the mortgage department at First Boston, put a trade in expecting the interest rates to rise. Instead, they did the opposite. Fink lost the firm $100 million, and in the process he lost his job, too. He had joined First Boston as a graduate trainee, and his talent and abilities propelled him forward, and he was expected to make CEO. He was one of the brightest, tso how did he make such a fatal mistake, leaving his position uncovered? It turned out that it wasn’t his mistake. His back office, the nervous system of any operation, made a catastrophic error. We find the explanation deep in one of the most recommended books in the industry, What It Takes, by Stephen Schwarzman: “But a guy from the back office who ran Larry’s computer models had made a mistake, and the hedges were wrong. Larry had made his calculations based on the wrong numbers. In a single quarter, his department lost $100 million. It wasn’t his fault; he didn’t control the back office.”
Fink lost his job and must have left with a long-lasting memory and a drive, which some still call a “neurosis,” to have precise risk-management tools to measure and manage risk in portfolios. Two years later, in 1988, just before the Berlin Wall collapsed in Europe, he opened BlackRock in a modest office in New York. BlackRock’s first employee, Charles S. Hallac, was to take the lead on Fink’s fixation and start building Aladdin, the acronym for Asset, Liability, Debt, and Derivative Investment Network. Hallac remained with BlackRock for his entire career and eventually became the co-president. Throughout his entire career, his agenda was to make Fink’s vision work: to build and own a robust risk capability that would provide a comprehensive risk overview of a firm’s portfolio and be fully integrated with the investment process.
“To really understand BlackRock, you need to understand Aladdin,” says chief operating officer Rob Goldstein, who oversees Aladdin as head of BlackRock Solutions. “In the earliest days of BlackRock—almost from day one—the firm was very focused on building this risk capability to understand each and every asset, each and every benchmark, and each and every portfolio.”
Goldstein joined BlackRock as an analyst in 1994, which was dubbed the Great Bond Massacre year, as the Fed began raising interest rates more than the markets expected. Fixed-income portfolios blew up amid rising interest rates and shrinking bond prices. In this volatile environment, the risk analytics built as Aladdin revealed its value. BlackRock’s funds held up well and had minimal loss compared to the overall market. Aladdin enabled BlackRock investment teams to understand what they had bought. The market took note, and people started to call BlackRock, asking them to “take a look at their portfolio.” This was the first instance that showed BlackRock they had built something their competitors didn’t have. Although the level of technical sophistication was not that high, according to Rob Goldstein, “you were a highly technical person if you knew how to use Lotus 123.” In mid-1990, BlackRock already “had the capability to capture trades electronically, to have dashboards with different colours to manage the work flow digitally, to have all positions in real time. That was shockingly rare at that time.” In the midst of 1995 crisis, BlackRock quickly understood that the technology that they developed and that they thought others might have, was actually “quite unique in the industry at that time.”
Goldstein candidly recalls the epiphany they had when they realised that they could sell this technology to third parties. It was on Halloween 1994, when they received a call from Kidder Peaboddy, the brokerage subsidiary of General Electric, asking BlackRock to help them value its assets by looking at the data on a disc called the “Michelle Spreadsheet,” with more than 1,000 rows of trades. As they would perform the trades, they would shout at Michelle (an employee at Kidder Peaboddy), who would input those trades in her spreadsheet.
Aladdin was originally designed as a piece of tech to analyse risk. In time, it has evolved into an embedded enterprise system that supports a wide range of business processes like a central nervous system of the enterprise.
BlackRock’s Phenomenal Growth
In 2020 BlackRock is an asset-management colossus, managing more than $7.7 trillion. This is the story of phenomenal growth, supported by a sound technology core and a few carefully selected acquisitions like the following:
Merrill Lynch Investment Managers in 2006, which took them into the European equities.
Barclays Global Investor in 2009. BlackRock paid $13.5 billion for BGI. The acquisition doubled BlackRock’s assets and helped BlackRock set a firm foot into the ETF market, as BGI owned iShares, the biggest name in exchange-traded funds (ETFs), a rapidly growing $1.4 trillion industry. This acquisition prompted The Economist to comment that “The firm's girth also threatens to attract the gaze of regulators.”
eFront acquired for a reported $1.3 billion, giving BlackRock an entry into alternative investment management.
Aladdin not only protected BlackRock's own portfolios by flagging systemic risks in 2008 but also provided a unique opportunity to answer one of the federal government’s most ardent needs—to evaluate the risk exposure in the banks’ portfolios. Banks called BlackRock to evaluate their portfolios, and Aladdin was used by the Fed, the banks, and the Treasury. This boosted Aladdin’s portfolio of clients to a total of $7 trillion of assets under management in 2008. While the world was melting down, Aladdin was rising above it all. Aladdin kept on growing and adding more institutional clients and became the point of call during financial crises. JP Morgan started using Aladdin and paid a reported $1.5 million for integration and the annual fee, which kept growing to $5.3 million.
Since 2017, BlackRock has stopped reporting Aladdin’s assets under management and number of clients. As the broader stock-picking business has come under pressure from lower cost index funds, BlackRock’s CEO aims to derive 30 percent of revenues from technology services by 2022, namely Aladdin. It is estimated that Aladdin has in effect about 10 percent of the world’s financial assets.
This is one of the most comprehensive end-to-end portfolio management softwares. Aladdin’s website states that Aladdin monitors 2,000+ risk factors each day—from interest rates to currencies—and performs 5,000 portfolio stress tests and 180 million option-adjusted calculations each week; it assesses hundreds of risk and exposures metrics to create tailored reports and graphics, based on a client’s specific needs and preferences. Aladdin and Aladdin Wealth are relied on by approximately 55,000 investment professionals around the world. Aladdin Wealth has made a much-needed entry into wealth management with a hard-to-resist proposition. They have started attracting wealth clients like Morgan Stanley and HSBC, which will offer this technology primarily for clients with more than $1,000,000 in their portfolio. Aladdin claims that it provides tools to help organisations communicate effectively, address problems quickly, and make informed decisions at every step of the investment process.
Aladdin is BlackRock’s proprietary technology, owned and controlled by them, and is delivered as a hosted service, including the Aladdin technical infrastructure, system administration, and interface with data providers and industry utilities. Aladdin is sticky and complex to enter and exit, making it the go to software.
In 2013, The Economist set their gaze on BlackRock and called it “the monolith”. They focused on Aladdin and pondered, “Getting $15 trillion in assets on to a single risk-management system is a huge achievement. Is it also a worrying one?” Its reach extends further: to corporate bonds, sovereign debt, commodities, hedge funds, and beyond. It is easily the biggest investor in the world, with $4.1 trillion of directly controlled assets (almost as much as all private-equity and hedge funds put together) and another $11 trillion it oversees through its trading platform, Aladdin (see article). In 2019, Aladdin’s business model made the subject of the landmark case BlackRock Investment Management (UK) Ltd v HMRC on VAT treatment of technology platforms’ fees.