Data Action Layer July 8, 2021
The data keeps coming. From all sides, in all forms, for investors in alternative assets. Capital calls. Distributions. Estimated net asset value (NAV) monthly and quarterly reports. Emails, social media, satellite weather reports, PowerPoint decks, and other diverse and unstructured data types.
An alternative asset is a financial investment that falls outside of conventional investment categories. So instead of stocks, bonds, and cash, alternative investors allocate funds to private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. But to make intelligent alternative investment decisions, the constantly growing volume of data about such investments must always be readily available. Yet the manual processing of this data leads to errors, higher costs, and frustrated people across the board: asset managers, general partners (GPs), limited partners (LPs), clients, you name it.
What’s needed: data extraction tools that can automate and streamline traditionally cumbersome and error-prone manual processing of all alternative investments data—structured and unstructured alike—to deliver accurate and timely information to clients.
According to a recent survey by Cutter Associates, an overwhelming majority (82%) of financial services firms plan to increase their spending on alternative investment systems and processes over the next 24 months. Most firms (63%) said they would benefit from a system that supports automated data entry.
Yet few have yet implemented such a system. For example, despite increased volumes of capital calls, only 27% of firms have automated solutions to support capital calls processing.
Here are the five top reasons why alternative investors need data extractions and workflow automation tools.
Today, both GPs and LPs are increasingly requiring more timely—and deeper—analyses of how their alternative investments are performing with LPs wanting greater transparency. They need specific information so they can focus on real-time decision-making and seize opportunities that competitors have yet to uncover. More transparency is also needed so that reports are more regularly and rigorously delivered to clients across the entire investment cycle.
Because of the volume and complexity of the data—much of it unstructured—teams spend a large proportion of their time extracting relevant data from documents and streams, putting it into forms that can be processed, and then analyzing it to derive value from it.
Professionals working with alternative investments can spend months analyzing and reporting on final data. That’s becoming increasingly unacceptable to both GPs and LPs. Then there’s the time sink. The more time asset managers spend on wrangling data, the less time they have to do the more important work of getting the most alpha out of their investments by enhancing portfolio performances and optimizing operations.
Leading data workflow automation solutions can transform unstructured data into accessible outputs in seconds. Not only does this save significant time and allows clients to make informed decisions faster, but it also helps free up the valuable time of asset managers, allowing them to take on more data sources.
Hedge funds, private equity firms, and the like are not just investing in alternative assets; they’re also using alternative data to identify opportunities and maximize return on their investments. Alternative data comes from unconventional sources other than those generated by traditional financial and economic activities. Typically found in unstructured form, alternate data is generally not broadly distributed and can be used to achieve both investment and operational alpha.
The Alternative Investment Management Association (AIMA) points out that using alternative data is not a new practice. What is new is that investors are getting access to much more of this data as more and more activities, events, and trends are digitized. Today, hedge fund managers can choose from numerous alternative data sources, including satellite imagery, weather patterns, social media trends, and consumer spending habits, and more, to help them improve investment performance.
In a new survey of global hedge fund managers, AIMA found that 53% use alternative data, with 25% of those managers having used this type of data for more than five years.
Because most of this data is unstructured, getting it into a manageable form and integrating it into current investment processes and systems can be difficult. That’s where new technology solutions come into play. These AI- and machine learning-based tools can eliminate manual data entry and retrieval and re-envision operational workflows, transforming the processes required to get value from alternative data. This allows your professionals to get actionable results and focus on what matters: growth and returns.
As with traditional investments, data on alternative investments must be collected, aggregated, and reported on across numerous regulatory regimes, both domestic and international. For example, there’s the Alternative Investment Funds Managers’ Directive, the Markets in Financial Instruments Directive II, Basel III, the Foreign Account Tax Compliance Act (FATCA), and Dodd-Frank. But according to the Cutter survey, six out of 10 firms (59%) with alternative investments in their portfolios are still in the early stages of creating formal data governance programs.
Technology can help mitigate the regulatory challenges brought on by alternative investments, ensuring firms can keep up with industry best practices. With a comprehensive data extraction and process automation application, firms can turn regulatory headaches into efficient pipelines of auditable reporting. It can also free employees from tedious, error-prone tasks to focus on more high-value, rewarding work.
Private equity and hedge funds investing in alternative assets need to re-think the way they manage and report on risk. After all, today’s markets require that they simultaneously demonstrate exceptional performance while meeting ever-more demanding risk requirements. For that, they need broader risk data on a wider set of asset portfolios.
From a capital allocation perspective, managing investment risk efficiently is something that hedge fund managers traditionally have done very competently. But when it comes to alternative investments, the idea of risk-adjusted returns—using value at risk (VaR), cash flow at risk (CFaR) or volatility of underlying NAV, for example—depends on the asset manager’s ability to deliver attractive returns and manage risk exposure on assets that fall beyond the boundaries of what many investors are comfortable with. Seeking alternative data on alternative investments can help mitigate risk, but managing the data itself then can become problematic (see #2, above). For that reason, an intelligent data capture solution can tremendously bolster managers’ abilities to manage alternative risk effectively.
Digital transformation is having a profound impact on businesses across the globe, and it has not gone unnoticed by the alternative investment community. Stakeholders—expecting their organizations to adapt to the demands of the growing private equity and secondary markets and deal with increased fund and deal sizes—understand that investing in the right technologies could help them stand out from their competitors. And since data capture and automation solutions unblock some of the biggest blockers for GPs and LPs, implementing this technology no longer becomes a question of “if” but “how soon.”
Cost-effectively extract diverse data—structured or unstructured—in real-time. Automate the entire data collection and transformation process, even for the most complex and swiftly evolving data points. Free up your team for higher-value work. Make the most of 100% of your investment data, traceable back to its source, to make informed, actionable, and auditable decisions.
Alkymi Data Inbox does all this and more, combining financial service expertise, real-time data extraction, and human-in-the-loop safeguards in a scalable, enterprise-ready solution that is very beneficial for alternative investors.
For more information, request a demo today.
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