The 2007-09 financial crisis prompted traditional investors to make alternative assets a prominent part of their investment portfolio. The main reasons for this shift to alternate asset classes was due to low correlation with equities and bonds, diversification, greater alpha, and hedge against inflation.
Alternative assets have been on the growth path; with only USD 3 trillion under management in 2003, the industry has grown by 400% over past 16 years to USD 15 trillion in 2019 and is expected to reach USD 18 trillion by 20241
Revenue from alternatives assets as percentage of revenue from all asset classes (active, passive, alternative, others) has grown from 29% in 2003 (estimated at USD 30 Bn) to 46% in 2019 (estimated at USD 137 Bn). The projection for revenue for 2024 stands at USD 162 Bn1.
Alternative assets primarily can be segregated into 4 asset classes namely Private Equity, Hedge Funds, Real Estate and Private Debt. Infrastructure, energy and other exotic investments like art are some of the other alternative assets in play.
Table 1 represents the breakup of alternative asset classes, their performance, and the respective opportunities.
Understanding the components of alternative investment cycle and their fundamentals
Alternative Investments have a different trade cycle (absence of clearing house and central counterparties, longer trade cycle) as compared to traditional asset classes. The investment cycle can last from as short as 1 year in the case of hedge funds to as long as 7-10 years for a PE fund.
Typical challenges in the alternative asset industry
Platforms handling traditional asset classes may not be well equipped to support multi-asset investing. Most buy side applications do not have adequate capabilities to support diverse portfolios. To solve this issue, firms create separate operating models which lead to hiring of additional resources, formation of siloed departments, and lot of interdependence amongst them, creating a complex structure. Also, it puts additional pressure of integration on already burdened IT departments.
Data quality and accessibility challenges
Data is the key for making important investment decisions. Figure 1 deals with the various concerns regarding usage and availability of data for alternative investments:
Figure 1: Data challenges for alternative investments
Earlier, alternative assets like private equity and hedge funds had lower oversight from the regulators. Now, with the introduction of regulations like Volcker rule under the US Dodd Frank Reform, European Union Alternative Investment Fund Managers Directive (AIFMD) in addition to FATCA, MIFID and Basel, the alternative asset space is impacted to varying extent as depicted in Figure 2.
Figure 2: Impact of regulations on asset classes
The way forward
Like most other segments of the financial services industry, disruptions led by technology and advent of new ways of working is gripping the alternative investment industry. Firms have to act swiftly to take advantage of the changing investment environment and possible growth opportunities. To gain the lion’s share of this growth, firms must have state-of-the-art infrastructure and robust internal processes. The typical challenges involved can be addressed by leveraging modern technologies that will drive competitive advantage across the value chain by improving investment returns, organizational agility, and providing robust risk management.
Data is being generated at unprecedented levels and effectively analysing this data can provide insights that will have considerable impact across the value chain. Firms have to look further than mere routine automation of repetitive tasks for delivering enhanced and effective customer experience and defining new relationships.
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