Northern Trust: A Path To Transparency In Alternatives Investing

Aug 1 2017 | 5:31pm ET

A Path To Transparency In Alternatives Investing
By Serge Boccassini, Senior Vice President, Global Product Management

As alternative investments become more mainstream, transparency has become correspondingly more important to investors. Asset managers are facing demands for increased levels of transparency akin to that provided for traditional funds. Yet no clear industry standards have emerged regarding the best processes, technology or data requirements that will help investors and managers achieve the right balance.  

These were the findings of a recent global survey of asset managers and institutional investors conducted by Northern Trust and the Economist Intelligence Unit (EIU). The survey explored views on the importance of considerations such as regulations and transparency related to traditional and alternative investments; how these considerations are managed; and the role of data in the management process. 

Respondents also were asked how investment decision making has changed since the 2008 financial crisis. The results showed that, in the post-2008 environment, fund managers and investors pay more attention, both before and after investing, to their ability to access financial information for both traditional and alternative assets.

Many investment considerations raised by the survey, such as a firm’s investment policies, the impact of regulations and the degree of asset liquidity, increased in importance for both traditional and alternative investments post-2008. However, transparency took center stage. More than 60% of respondents ranked transparency as a major factor in investment decisions.

The reasons for this increased importance vary, but two factors stood out:

  • Increased emphasis on rigorous risk management
  • Regulatory requirements that seek more granular information

Nearly three-quarters of respondents (73%) cited portfolio risk management as the most important element, followed by regulatory requirements (53%). This was particularly evident for markets, such as the UK, where stringent and complex new rules have demanded greater focus on data.

The survey also assessed how firms obtain their data and analyze their results.  More than half of respondents rely on analyst reports and subscriptions to specialist databases, which is labor intensive and expensive. In addition, four in five rely “entirely” or “mostly” on internal data management and analytical capabilities to evaluate their investments. Only 6% outsource this function entirely. In an increasingly sophisticated and fast-paced environment, the ability to access information quickly and easily will continue to grow in importance. 

While transparency remains a major concern in alternatives investing, both managers and investors have different perspectives on how best to achieve it. The survey showed that:

  • Responsibility for ensuring that existing and potential investments are adequately transparent falls to multiple functions, including the investment management function, risk and compliance, finance and operations and IT.
  • While front office is primarily responsible for assessing if there is sufficient transparency to proceed with an investment, there does not appear to be industry-wide consensus for which executive is allocated the final say. 
  • The industry lacks coherent best practices regarding processes, technology or data requirements to ensure transparency

Firms can respond to these issues by developing policies and assigning ownership to the data management function that supports transparency. In addition, supporting industry-bodies that are working on standards and conventions can help provide consistent and comparable data.  Finally, if internal resources are limited, firms can outsource to find data aggregators that can more efficiently present, analyze and interpret data.

To learn more about the survey results, read the full white paper or contact the author at (312) 557-2863.


In Depth

Q&A: Sancus Capital And The Disruption Of The CLO Market

Oct 5 2017 | 6:28pm ET

Traditional collateralized loan obligation (CLO) funds in the U.S. market can offer...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Finding Success as Alternatives Converge

Oct 9 2017 | 4:00pm ET

Rising interest among institutional investors over the past several years has led...

 

From the current issue of