Navigating the New Frontier: Overcoming Complexities in Alternative Investments

Data Challenges and Complexity

Much of the complexity caused by alternative investing is rooted in data. Significant data challenges include the following:

• Transparency and latency of information
• Extracting information from unstructured data sets
• Data aggregation for purposes of risk management, performance measurement, and reporting
• Access to borrower and underlying asset performance
• Portfolio management risks because of the lack of market alternatives data feeds

Below is a snapshot from the 2023 Cutter Research Alternative Investments member survey showing our members’ challenges with alternative investments.

Impact of Complexity

In our 2023 member survey, the following two statistics jumped out that illustrate how firms are responding to the complexities caused by alternative investing:

• 87% of surveyed firms intend to increase technology spending in the next 18 months.
• 60% of surveyed firms plan to increase staff budgets.

Certainly, as teams work to fill the operational gaps, alternatives data challenges bring additional costs. One larger impact of the complexity is that it’s difficult to gain a single view of “the truth.” Without a solution that collects, aggregates, and processes alternatives data, team members often arrive at their own version of “the truth.” When team members have singular perspectives on investing rather than an enterprise perspective, it’s difficult to make investment decisions promptly and with full confidence.

In response, firms are fortifying their governance and risk management frameworks to manage the increased operational risk through clear roles and responsibilities along several lines of defence as follows:

• First line of defence: Investment governance and valuation frameworks, policies, and internal controls
• Second line of defence: Monitoring and oversight of risk management and compliance
• Third line of defence: Internal audit

Seeking Solutions

To resolve the complexities generated by alternatives, firms are looking to providers to simplify operations. However, many firms created operating models that focus on supporting public market assets, with little consideration of the private market team’s needs. Private market teams were generally ring-fenced from both an investment perspective and from a core private administration support functions perspective, such as operations, accounting, and transfer agency. Asset owners and multi-asset managers now are placing greater emphasis on bringing investment insights together, creating a “whole of portfolio” view and moving operational support teams from the asset classes into a centralized group.

Vendors are adding capabilities to their tools, including the following:

• Data provisioning: proprietary datasets for pre-commitment due diligence, benchmarking, and market analysis
• Analysis: tools for forecasting, simulation, and risk management
• Services: managed services across data collection, due diligence, ESG, and more

Existing vendors are expanding solutions to meet the needs of the various asset classes. Best-of-breed solutions still provide the most comprehensive functional fit for many asset classes. Based on our research, Cutter is seeing vendors partnering with other providers to close gaps and provide clients with a broader functional solution.

Need Help?

Cutter is equipped to guide firms through the complexities of alternative investments, and we offer the following specific solutions:

1. Cutter Benchmarking: compare your alternative investment practices to leading industry and peer firm practices.
2. Operating Model Framework Accelerator: outline functions and sub-functions for alternatives, including investment governance, data, and valuation frameworks, data strategy, and an outsourced-versus-insourced solutions model.

Partner with us to navigate the intricacies of alternative investments efficiently and effectively. To learn more, connect with Chanelle Crabtree at [email protected].