Alternative Asset Managers Face Up to Data Demands
The importance of environmental, social and governance (ESG) factors and the search for returns in an uncertain market are fueling investor demands for greater data transparency and smarter data analysis.
Investors in search of new sources of income are increasingly moving toward alternative asset classes.
However, the growing scrutiny on fund performance and ESG is forcing alternative asset managers to take a critical look at their data systems.
Regulators and investors across the globe are hungry for data and information. The wake of the COVID-19 health pandemic and global economic crisis has investors on edge about the outlook for markets and economies, threat of inflation and more. At the same time, ESG has shot to the top of the agenda. Market authorities and investors are demanding complex and detailed analysis of investments’ impact on factors from carbon footprint to biodiversity and employee working conditions.
For alternative asset managers, this presents both an opportunity and a challenge. Are they ready to meet the investor demands for ever greater transparency and analysis?
Our research, Assessing the Outlook of Professionals in the Insurance and Investment Industries, found that alternative asset managers are planning greater investment in data management and analysis, and exploring outsourcing and external data analysis to boost their effectiveness.
Keeping Pace with Demands
Our survey of 122 alternative investment professionals found that only 57 percent of respondents gave a positive rating to their company’s data management processes. The majority 70 percent acknowledged they will have to invest more in data storage, management and analysis to meet the rising demands. Yet only 24 percent said their organization had made this investment.
The need for investment is also driven significantly by the ESG agenda, which has become the biggest single issue facing investment professionals. More than three-quarters (76 percent) said that analyzing and reporting ESG data will be important for their future success, with 21 percent saying it would be ‘extremely important’.
Vincent Georgel-O’Reilly, head of our Alternatives segment for Europe, Middle East and Africa, says, “The global pandemic has accelerated not only ESG integration among alternative managers in Europe, Middle East and Africa, but also investors’ demand on transparency around the ESG profiles of their portfolios.”
Updating Technology and Adapting to Thrive
Meeting the rising expectations of both regulators and investors will require three things: data storage, data management and data analysis. At the root of this challenge lies the information technology and systems available to alternative investment managers and three key questions:
- Are existing legacy systems efficient enough to address the challenge?
- Are these services best handled in-house or can they be effectively outsourced?
- Can external providers and third parties give them an edge in analyzing the volume and complexity of alternative data?
When asked what factors would be highly important for their growth strategy over the next 12 months, 56 percent of alternative asset managers showed their inclination toward increasing investment in new technology instead of maintaining legacy systems. ESG reporting is also of high importance. More than three-quarters (76 percent) of alternatives managers say they expect ESG data analysis and reporting will be key to their success.
On outsourcing, 30 percent said that they still mainly used in-house systems for back- and middle-office operations, and more than half (52 percent) said that they were planning to outsource more activities in the next 12 months. Simplifying outsourcing arrangements were also a priority for many, with 41 percent saying they planned to consolidate their outsourcing partners. Investment risk monitoring and investment analytics were at the top of managers’ lists for potential outsourcing. These trends — more outsourcing and greater use of third-party data and analytics while also consolidating and simplifying those relationships — highlight the importance of a partner who can take a rounded and integrated view.
To avoid falling behind their more data-efficient competitors, managers must develop nimble strategies and strip out unnecessary complexities.
Vincent said, “The firms that take a strong technology-led approach to meeting the evolving needs of their clients will set themselves apart. We expect outsourcing to gain momentum as firms seek external service providers to make the best use of their data.”
As alternative asset managers increasingly look to optimize their business, a single, end-to-end data management system provides users with the access they need to assemble and manage data from both internal and external services across the whole investment process.
When it comes to ESG, managers will look for opportunities to combine traditional financial data with ESG data to understand the true value of their assets and portfolios.
At State Street, our ESG data solution allows managers and portfolio companies to collaborate at a granular level. Our infrastructure integrates traditional financial and operational indicators with ESG data from leading providers, as well as the Sustainability Accounting Board’s materiality framework and our own internal investment expertise. The result is streamlined, customizable analytics and reporting across the investment operation.
We also offer fully hosted data management services that can aggregate data on multiple assets classes from any third-party vendor. Data GX gives clients a detailed understanding of security, performance risk and other essential data needs. Through our data analytics platform, truView®, managers can manage and analyze risk end to end — from stress testing and macroeconomic analysis, through to reporting requirements from investors, regulators and boards.
Throughout 2020, we also announced a series of strategic partnerships to bolster our alternatives offering for clients. For hedge funds, we partnered with Coremont on a fully integrated outsourcing service that offers clients greater transparency and helps reduce errors while their managing data. For private markets, we forged unique alliances with iCapital Network and Virtus to provide data management platforms that help clients accelerate launches, establish scaled access to wealth management channels, automate administrative processes and monitor performance.
Alternative asset managers are facing evolving demands from clients that expect data transparency and ESG factors integrated into investment analysis. This can be a significant challenge if data and operational models are fragmented or out of date. Managers that embrace technology, upgrade their systems, and work with a skilled partner will be ready to face up to the demands of their investors.
 This survey was conducted by PollRight in August and September 2020 among 122 alternative investment professionals in the US, the UK, Europe, Asia, and Latin America.