Transparency for Investors and Regulators Drive Alternative Fund Change

While allocations to alternatives have made a comeback since the crisis, four out five fund managers still see fundraising as their greatest challenge, while regulation and investor demand for transparency are causing the most change in the sector.

In a survey of alternative fund managers (consisting of hedge funds, private equity and real estate funds) by State Street and Preqin, respondents said that the outlook for the alternatives sector will be marked with change and increased competition; the managers that can offer innovative products and strategies to satisfy investors, particularly in regards to performance and risk transparency, will be the ones who come out on top.

One area of investment change has been the offering of managed accounts. Since 2008, 26% of alternative funds have started offering these accounts, which give greater control to investors, and another 18% plan to offer these over the next five years.

Another new offering stemming from regulation has been alternative ’40 Act funds and UCITS funds. While private equity and real estate funds barely use these vehicles, they are gaining popularity with hedge funds. 9% of hedge funds have launched alternative mutual funds since 2008, and an additional 12% plan to do so over the next five years. UCITS funds have been even more popular, with 12% of hedge funds offering this regulated vehicle since 2008 and 14% planning to do so by 2018.

The largest investment change, however, comes in the sense of adding new investment strategies using in-house resources. A quarter of all alternative funds surveyed said they have used more strategies over the last five years, and 29% more plan to offer more over the next five years.

In terms of operational change, 44% of alternative funds said they have reported more information to investors to 2008, and another 9% said they will do so within five years. Alternative funds are not only reporting more information, but they are also reporting this information on a more frequent basis; 32% said they are already reporting more often than they were pre-2008, and an additional 8% plan to report more over the next five years.

“The demand for transparency from more sophisticated investors has created the need for better data and analytics. Investors want assurance that their fund managers can provide the insight they are looking for to understand performance and risk, among other factors,” the report says.

However, only 15% of funds have used new techniques to address these areas since 2008, and only 9% more plan to do so by 2018. Thus, technology could be a differentiator.

“Some of these managers have tools to analyze the investment portfolio, but these platforms are rarely designed to produce data in a way that will meet regulators’ and investors’ needs,” the report says. “Managers who have the right systems to capture, structure and report data on demand for their stakeholders will have a clear advantage.”