Hedge funds, private equity, real estate and other forms of alternative investments once involved a simple trade off – uncorrelated and often greater returns in exchange for less understanding about the investment and a reduced ability to move money on short notice. This was an enticing proposition for many – an estimate by the analytics company Preqin found that private assets under management alone were worth more than $4 trillion in 2015.
A recent survey conducted by Northern Trust and the Economist Intelligence Unit, examined how this relationship has changed. The survey of 200 asset managers and institutional investors found that transparency leads all investment considerations and has grown in importance since the 2008 financial crisis. Transparency in alternative assets was the most important post-investment consideration for 17% of respondents – a nearly six-fold increase since the financial crisis.
Investors gather information about traditional and alternative managers in the same ways – through specialist databases, analyst reports, press reports, market data fees and in-person visits. Alternative asset management firms need to support investors in their quest for information on complex, private or unlisted assets. In the past, certain firms have been reluctant to reveal much information, declining press interviews and only selectively participating in industry databases. As transparency becomes more important, that will certainly continue to shift.
More than half of our survey respondents said regulatory requirements were a key to growing concern about transparency, and this push towards regulation is driving changes inside of alternative investment firms. As EY Principal Samer Ojjeh said in the report, “Many private equity firms have brought in permanent chief compliance officers to ensure their people and their investment activities adhere to firm policies and regulatory requirements. We’ve seen this trend in both the United States and Europe, where new regulations have underscored the need for professionals focusing on compliance issues.”
The responsibility for transparency tends to sit in multiple places inside an investment firm. Our study found that both investment management and risk and compliance teams are involved, while either a key executive or the investment committee tends to have final decision rights on transparency issues.
For alternative firms looking to increase transparency, either in response to investors or just to stay current with the trend in the industry, we recommend taking three steps:
-Develop a standard policy to support the data management necessary for transparent portfolio management, and formally assign ownership to someone such as a risk or compliance officer
-Consider leveraging your service providers to aggregate data and provide consulting services around best practices
-Work with industry bodies to support and adopt conventions to provide investors with consistent and comparable data
Alternative managers need to recognse that investors desire transparency and take deliberate steps to meet these demands in order to succeed in today’s investment landscape.