Deloitte’s Center for Financial Services recently published its 2014 outlook for alternative investment managers. The outlook compares alternative managers to a downhill skier who excels in uneven terrain. It’s snowing again - the industry is growing. In 2013, hedge funds managed a record $2.6 trillion in assets and PE raised more funds than in any year since 2008. But the slopes look different and more daunting than ever.
The report covers key aspects of the near-term outlook:
- Institutional investors are adopting a more sophisticated approach to their investment decisions. They are deciding which hedge funds and PE houses to invest in based on themes, such as strategy, geography and liquidity. Their view of alternatives as a discrete asset class is fading fast. But which funds will look best to the thematic investor?
- Smaller PE funds are developing expertise in sector or theme based investing strategies. They are examining specific niches within healthcare, technology, energy and real estate.
- Investors are placing a higher premium on funds’ risk management. This is cyclical. Memories of the crisis are still painfully fresh. But it is also structural. Institutional investors form an increasing share of the client base. And these investors have a fiduciary duty to make prudent investment decisions for their clients. The main beneficiaries of this trend will be the larger, well established funds. Institutional investors tend to view them as the most advanced risk managers. Their impressive operational and compliance functions are a selling point.
- Hedge funds and PE are improving their risk management. But they are also being more strategic in how they go about it. They are identifying and weighing risks when deciding where to allocate resources. Risk-based resourcing models are a useful tool for this job.
- Alternative managers are developing products which better reflect institutional investors’ obligations to the end investor. They are creating investment offerings which are customised according to the unique obligations each institutional client owes to its own investors – the retail customers at the end of the value chain.
In a post-crisis world of black box investing and flash crashes, investors and regulators want to know more about risk and performance at alternative managers. Who can blame them? Some large investors will now only invest if a fund can generate customised reports as part of due diligence. The biggest funds are best placed to flourish in an increasingly transparent world. They have the required infrastructures lacking at smaller competitors.
Effective data management will be central to keeping data hungry investors and regulators happy. The most advanced alternative investment managers have developed comprehensive data strategies to do this – and to identify investment opportunities into the bargain. Data warehousing, advanced modelling and a Chief Data Officer are just the starting point.
Peter Evans - Assistant Manager, Insurance & Investment Management Insights
Peter Evans is an Assistant Manager in the Insurance and Investment Management Insight team. Prior to joining Deloitte, Peter was a strategy analyst at Lloyd’s of London and Munich Re. He holds the Chartered Insurance Institute Diploma and an MA in history from Edinburgh University. LinkedIn