Liquid alternatives are on the rise. According to a 2014 study from Deutsche Bank, assets under management in alternative mutual funds have grown annually at 38% since 2008, compared to an annual growth rate of 9% for the U.S. mutual fund industry overall. This is a pattern which is repeated in Europe, where assets under management in traditional UCITS are growing at 2% in stark contrast to the 40% annual assets growth in alternative UCITS. And the growth does not look set to stall – McKinsey & Company project inflows to liquid alternative funds (liquid alts) will reach $900 billion by the end of 2015.
Clearly, liquid alts are on the rise and it’s easy to see the attraction of the combination of absolute returns and liquidity in a structure which is more transparent and more highly regulated than a hedge fund. It provides diversification and downside protection to a portfolio whilst offering the regulatory oversights and accessibility of a more regulated fund structure (’40 Act or UCITS).
The continuing growth of liquid alts means that now, more than ever, the worlds of mutual and alternative funds are overlapping. This presents new challenges to the fund administrator who may wish to set themselves up to handle the complexities of these hybrid investment vehicles. For the administrator who can provide this service, the market potential is considerable.
For any fund administrator, being prepared for liquid alts means addressing specific areas of process and functionality to verify that they have sufficient robustness to handle these requirements alongside existing business.
Technology can be an enabling factor here, providing it is sufficiently flexible and scalable. Here are five key capabilities you should consider if your business handles – or plans to handle – liquid alts:
Handle a wide range of asset types
Is your system capable of handling the diverse range of asset types present in liquid alts? Liquid alts may include derivatives and other non-traditional holdings which you need to be able to process through your system. In addition you may need to be able to handle simultaneous long and short positions.
Process for daily, weekly and/or monthly cycles
In the past, alternative structures were typically valued on a monthly basis (with some valuing weekly) whereas traditional funds tended to value daily. Now, with the blurring of the lines between the two, alternative managers operating in the liquid alts space will need to value more frequently. You need to be confident that you can handle the various different valuation frequencies that will arise.
Support both traditional and alternative capital flows
In the traditional world there was always a strict T+x settlement period whereas in the alternative space you settled on a ‘cleared funds’ basis. The advent of liquid alts means that managers have to offer a defined settlement period. You need to ensure your system can support all types of settlement cycles, including redemption ‘hold backs’.
Be responsive to the various different types of regulatory oversight
You need to have the infrastructure in place to support a wider variety of regulations. For example, in the US you may have funds registered under the Investment Company Act of 1940, as well as alternative funds subject to the Dodd-Frank Act and other regulatory bodies such as the CFTC. In Europe, this equates to being compliant with both UCITS and AIFMD regulations. Your software needs to be sufficiently flexible to adapt quickly to changes in legislation from many different bodies with a correspondingly versatile reporting engine.
Simultaneously manage standard ’40 Act structures and more complex alternate investment strategies
Whether you’re coming at this with alternatives experience or from the traditional side, liquid alternative funds will test your systems, processes and procedures. From an alternative perspective, you’ll be taking on the regulations that go hand in hand with ’40 Act & UCITS funds. The increased reporting and daily valuations will require more robust systems. Straight-through processing right out to the end client will become key, and increasing scale without commensurately increasing costs will be imperative. If you are in the traditional space, embracing alternative strategies means deploying a system which can handle more complex fund structures and investor fee accounting, with multiple counterparties and the efficient tracking of cash flows.
It seems that liquid alts are more than the latest buzz word. Not only is this a market set for growth, according to predictions from both market commentators and participants, but it is also likely to become an investment mainstay. As such, administrators – both third party and in-house – should be prepared. This includes devising a technology strategy which puts in place systems capable of managing these funds effectively, alongside other investments. Firms that are ready will be in a strong position to capture a share of this growth market.
GC Perspective: Linedata’s Michael Galvin on How to Handle Liquid Alts
Liquid alternatives are on the rise. According to a 2014 study from Deutsche Bank, assets under management in alternative mutual funds have grown annually at 38% since 2008, compared to an annual growth rate of 9% for the U.S. mutual fund industry overall. This is a pattern which is repeated in Europe, where assets under management in traditional UCITS are growing at 2% in stark contrast to the 40% annual assets growth in alternative UCITS. Michael Galvin, product manager at Linedata, says that for any fund administrator, being prepared for liquid alts means addressing specific areas of process and functionality to verify that they have sufficient robustness to handle these requirements alongside existing business.