Finding Success as Alternatives Converge

Oct 9 2017 | 4:00pm ET

Editor’s note: Rising interest among institutional investors over the past several years has led to dramatic growth in the alternative investments industry, writes the team at SEI in this contributed article, but it has come with increasingly sophisticated demands for fee alignment and improved reporting, accounting and operational management. This strategic shift in demand means managers able to differentiate themselves not only by performance but also by simple and effective reporting, accounting and administrative processes will be best positioned to maximize their competitiveness.

Finding Success as Alternatives Converge
By Ross Ellis, SEI Investment Manager Services

The alternative investments industry has grown by 40% in just four years as institutional and other sophisticated investors continue to broaden their exposure to multiple asset classes and seek to reinvest the proceeds arising from years of healthy returns.

As investors become more sophisticated in their approach and look to diversify their holdings across multiple asset classes and structures while maximizing their portfolios’ returns, their appetite for a variety of alternative strategies has increased. Given the additional complexity of their holdings, together with inconsistent reporting from GPs, many larger investors are simultaneously making a concerted effort to streamline the oversight of their fund portfolios, with the result that the opportunities presented by growing demand are tempered by increasingly stringent prerequisites for selection.

Managers of alternative strategies are responding in a variety of ways. Hedge fund managers are expanding beyond their open-ended fund structures with more patient capital supported through close-ended, hybrid funds. Private equity firms are looking to attract a wider set of investors by diversifying their investment strategies and improving investor servicing through technology and automation, which was once the sole preserve of the hedge fund industry. A number of alternative managers also are looking to tap into the retail market. Meanwhile, a growing number of traditional managers are joining the fray with strategies and fund structures designed to appeal to existing investors in alternatives as well as newcomers to the space. 

Superior returns, trusted teams and firm size have traditionally served as key differentiators in the world of alternative investments. Faced with unprecedented opportunities in the alternatives market now estimated by Preqin to total $7.7 trillion worldwide, GPs now face higher standards, a more diverse set of benchmarks, as well as new constituents in the form of retail and emerging market-based investors. 

How can managers of alternative investments best position themselves to benefit from asset flows in today’s environment?

Currently, 80% of institutional investors tracked by Preqin are investing in at least one alternative asset class. As institutional investors continue reinvesting their profits, inflows to alternatives are likely to pick up pace. In spite of what appears to be a favorable fundraising environment, this growth may obscure an existential threat to managers lurking beneath the surface – a threat that may have profound implications for how alternative managers run their businesses.

Frustrated by deficiencies in transparency and reporting, and in some cases, perceived misalignment of interests as it relates to returns relative to fees, a growing number of investors (limited partners or LPs) are choosing to invest directly, circumventing working with managers (general partners or GPs) entirely. Positive outlook for alternative assets as a whole aside, the question for many GPs remains: How can managers of alternative investments best position themselves to benefit from asset flows in this environment?

The answer is not as clear cut as it once was. Asset classes are converging, investment vehicles are evolving, and business models are changing, making it difficult to offer an attractive value proposition in an economically sustainable fashion. Attracting and retaining investors increasingly requires that managers differentiate themselves not only by their performance but also by adopting reporting, accounting and administrative processes that are both simple and effective.

In short, GPs need to make a number of carefully considered operational decisions that will directly affect their ability to maintain good relations with their investor bases and conduct successful capital-raising activities over the next decade.

In our latest paper, based on a survey of GPs, Finding Success As Alternatives Converge, SEI found that institutional investors continue to exhibit a strong appetite for alternative investments but indicated that demand patterns appear to be changing. These shifts make it more critical than ever that fund managers position themselves strategically in order to maximize their competitiveness.

There is little consensus as to which type of firm is best equipped to meet the needs of institutional investors. Employees of firms involved in a single asset class are much more likely to stress the advantages of focused expertise, while firms managing several asset classes are much more likely to advocate diversified business models. Investor expectations have changed over the years, and many GPs have heard calls for greater transparency, negotiated fees, more frequent reporting and greater access to portfolio managers. The capital-raising process also has evolved and a growing number of firms are offering customized investment vehicles with unique reporting and accounting requirements.

Many firms plan to use technology to help them meet investor requirements and disseminate the information to a progressively more sophisticated investor community. Partially as a result of automation and increased operational efficiency, fees have come down at many firms, investor onboarding times have improved and some GPs are taking the lead in safeguarding their clients’ information by addressing cyberthreats head on. A significant number of managers are finding that they can optimize technology spending by forging partnerships with external specialists in one or more functions.

Operational characteristics that may have once been seen as secondary features are now critical items on due diligence checklists, representing the cost of admission. However, as investors and their advisors develop a growing awareness of the options available, they will no doubt continue to ask for more and develop more stringent requirements. As alternatives converge, vehicles and strategies become less standardized and asset managers’ businesses become more complex.

Additionally, it will become increasingly critical that operations are run on integrated platforms that allow firms of all types to support their investment expertise with a streamlined and technology-enabled investor experience. Integrated platforms also give managers the agility needed to experiment with newer, innovative structures and pivot to side vehicles as the market demands.

Best approaches for GPs to future-proof their businesses 

The bar, the minimum needed just to get in the game, will be even higher tomorrow. What can asset managers do to prepare themselves going forward? A single best approach is unlikely in such a fluid environment, and managers seeking to optimize their businesses will need to focus on more than just one aspect to be in a competitive position going forward. Rather, decisions will need to be made in the context of business strategies, market positioning and investor needs. Still, it is possible to point to some best practices. 

As alternatives converge and investors continue to reevaluate their approach to investing, the most successful firms are likely to be those that select the best people and strategies from both the private equity and hedge fund worlds. Investors are becoming less concerned with artificial silos when it comes to asset classes and investment vehicles. They want to be offered solutions tailored to their needs and executed by talented teams in a timely and transparent way that meets their mandate.

The same goes for processes and systems. As businesses become more complex, it will become increasingly critical that operations run on flexible, integrated platforms that focus on investor outcomes rather than the underlying technology. Systems will need to be capable of handling closed end fund structures alongside more liquid portfolios. Listed securities and syndicated loans from around the world need to be accommodated alongside traditional assets. Full data transparency will be expected, with multiple systems being able to talk to one another so managers can provide insights across asset classes, structures and vehicles. More sophisticated infrastructure will also enable multi-strategy funds to customize their risk exposures. 

Customized investment strategies, fund structures and investor communications should all be anticipated. Infrastructure should never stand in the way of a manager being able to launch new products, enter new markets or provide better and timelier reports. Broadly diversified managers and specialist GPs alike will need to understand that their operational capabilities form a core part of their value proposition, and ultimately, determine whether they can support their investment expertise with a streamlined and technologically supported investor experience. 

Investment acumen, networking skills and self-confidence remain the key drivers of success for alternative managers. But in an increasingly crowded and competitive environment, we can add operational capabilities to the list.

SEI is a leading global provider of investment processing, investment management, and investment operations solutions. To download the entire paper, please visit

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