Transparency is key to success for alts investing, says Northern Trust survey
As alternative investments become more mainstream, information about investment vehicles, underlying assets and other risk management data has become more important to investors, but best practices around transparency requirements are lagging behind the demand, according to a survey released today by Northern Trust.
The independent survey of 200 asset managers and institutional investors, conducted in February 2017 by The Economist Intelligence Unit (EIU) and sponsored by Northern Trust, reveals that transparency leads all investment considerations and has grown in importance since the 2008 financial crisis. Respondents indicated the higher level of scrutiny applies to both traditional and alternative investments, such as hedge funds, private equity, infrastructure, real estate and natural resources.
“Degree of transparency” was cited as very important by 63 per cent for alternative and 62 per cent for traditional investments, leading all other considerations.
Transparency became more significant after the financial crisis, cited as the most important post-investment consideration by 21 per cent for traditional assets and 17 per cent for alternatives, compared to 9 and 3 per cent, respectively, pre-crisis.
Risk management is the most important driver for transparency in traditional or alternative investments: 73 per cent of respondents said portfolio risk management was the most important element, while 53 per cent cited regulatory requirements and 43 per cent cited competitive considerations.
However, there was no consensus around which department within an organisation ensures that existing and potential investments are adequately transparent, with responses pointing most often to either the investment management or risk and compliance functions.
“These results tell us that investment transparency is a growing priority, but asset managers and institutional investors remain unsure of how to best achieve it,” says Pete Cherecwich (pictured), President of Corporate and Institutional Services at Northern Trust. “As alternative investing has reached the mainstream, the industry would benefit from consistent standards and stronger policies around transparency. Working with the world’s most sophisticated investors, we are committed to enabling greater transparency through continued research and technology development.”
The survey showed that asset managers and investors tap a variety of sources for information on both traditional and alternative investments, including specialist databases, media reports and in-person visits. Four out of five respondents rely heavily on internal data management and analytic capabilities to manage their data. Only 6 per cent outsource this function entirely.
“Our clients are seeking the best way to analyse, interpret and present their data,” says Penelope Biggs, Chief Strategy Officer, Corporate and Institutional Services at Northern Trust. “We collaborate with clients to translate data into intuitive and meaningful information, delivered through innovative technology and transparency solutions, to help them focus on their investments.”
The EIU surveyed 200 executives of organisations ranging from private equity firms and hedge funds to corporations, nonprofits and insurance companies. Respondents were dispersed globally, with 60 respondents each from North America, Asia-Pacific and Europe, and the remainder from the Middle East. Half the sample is composed of respondents from organisations with more than USD5 billion in global assets under management.