State Street Corporation today announced new research,[1] which reveals that with increasing pressures and demands on returns and reporting, alternative asset managers have work to do to meet the growing needs of institutional investors. The survey found that just 57 percent of the alternative asset managers interviewed said their investment operations are built to scale to deal with increasing volume and complexity. 70 percent believe they will need to increase the amount they invest in data storage, management and analysis; and only 24 percent have already done so. 

Despite market instability, shifting business models and pressure on asset valuations, the vast majority (82 percent) of alternative managers surveyed believe their organization has been effective at responding to increasing investor demand for transparency and additional types of data. However, when highlighting areas for improvement, 57 percent positively rated their companies data management, but less than half (48 percent) said they have a good level of efficiency and effectiveness in their business’ technology systems, which underpins their use and management of data.

When it comes to how alternative fund managers feel current increased uncertainty and risk has impacted confidence in their sector; 44 percent believe it has increased, 27 percent think it has fallen and the remainder (29 percent) feel there has been no change.

“To avoid falling behind competitors due to data inefficiency, alternative fund managers must develop agile and nimble strategies, while stripping out complexities,” said Vincent Georgel-O’Reilly, head of the Alternatives segment, Europe, Middle East and Africa at State Street. “The firms that take a strong technology led approach to meeting the evolving needs of their clients will set themselves apart from competitors. As a result, we expect outsourcing to gain momentum as firms will turn to external service providers to make the best use of their data.”

Throughout 2020 State Street announced a series of strategic partnerships to bolster its alternatives offering for clients. Specific to Hedge Funds, State Street partnered with Coremont to bring clients a fully-integrated outsourcing service that allows them to enjoy greater transparency and reduction of errors. For private markets, State Street forged unique alliances with the likes of iCapital Network and Virtus to provide data management platforms that help clients accelerate launches, establish scaled access to wealth management channels, automate administrative processes and monitor performance.

ESG data management

While many alternative managers are at very early stages of planning for ESG implementation, their clients will place a greater focus on their ability to provide transparency and detailed reporting on their actions in this area. According to the survey, more than three quarters (76 percent) of alternative managers expect analysing and reporting ESG data to be important for their firm’s future success, with 21 percent saying it will be extremely important. When it comes to individual alternative asset classes, three out of four (75 percent) believe ESG will be of increased importance to private equity. This was followed by infrastructure (68 percent), hedge funds (61 percent) and private debt (58 percent).

“The global pandemic has accelerated not only ESG integration among alternative managers in EMEA, but also investors’ demand on transparency around the ESG profiles of their portfolios,” added Georgel-O’Reilly. “European regulation, such as the ‘disclosure regulations’ related to sustainability, and the climate-friendly expenditure in the EU’s COVID-19 recovery plan, is set to positively influence European firms ESG investing behaviour in the long-term.”

Misaligned views amongst insurers and fund managers

The pandemic has fueled the appetite of insurers for alternative asset classes, with 63 percent of alternative managers anticipating an increase in insurers’ allocations to infrastructure, with private equity (62 percent) and private debt (60 percent) closely behind. However, State Street’s survey identifies that a significant misalignment exists among allocation expectations of alternative asset managers and insurers. For example, 75 percent of insurers say they plan to increase their exposure to digital assets (e.g., bitcoin futures), while just 36 percent of alternative asset managers expect the increase. Similar gaps exist for other alternative asset classes – the corresponding figures for hedge funds and commercial real estate are 61 percent and 36 percent, and 55 percent and 25 percent respectively.

View the full research report, here.