John Wallace, global co-head of Alternative Funds Services, Deutsche Bank, notes the trends in the management of alternative investments. Deutsche Bank Alternative Fund Services is a sponsor of the Cayman Alternative Investment Summit, which will be held on 1 and 2 November at The Ritz-Carlton, Grand Cayman.
Deutsche Bank Alternative Fund Services has observed several trends in the management of alternative investments. The growing participation from institutions in our industry has been a key driver not only of the growth but also of the many changes in the industry. With managers successfully adapting to the shifting environment, we believe the key trends are as follows:
Growth and consolidation
According to the 2012 Deutsche Bank Alternative Investment Survey, alternative fund assets will continue to grow driven by increased institutional participation; institutional hedge fund management now accounts for about two thirds of hedge fund assets compared to less than one fifth in 2003. Additionally, 80 per cent of institutions either grew or maintained their hedge fund AUM in 2011 and increased the size of their teams by 25 per cent in 2012. Consolidation will likely continue – the big will become bigger. In 2002, no hedge fund had more than $10 billion in assets under management. Today, the world’s largest hedge fund manages almost $80 billion and 44 per cent of our survey respondents are invested with managers with $1bn+ in AUM.
Regulation
Regulation is to become an even more integral part of the industry with an increased focus on regulatory reporting. The shifting global regulatory framework including Dodd-Frank, the EU Alternative Investment Fund Managers Directive and the Foreign Tax Account Compliance Act has resulted in increased reporting obligations that are changing the way many alternative investment managers view their internal infrastructure, risk monitoring, reporting capabilities and compliance policies.
Using Form PF as an example, many alternatives managers have considered the outsourcing of the data compilation/aggregation necessary to meet their reporting obligations, and have had to align their processes to ensure consistency between their regulatory and investor reporting.
Transparency and reporting
There is also investor demand for increased transparency and standardised reporting. For private equity funds, the Institutional Limited Partners Association has been working to develop a series of reporting templates to help standardise reporting. These efforts are based on institutional demand for greater efficiencies, improved uniformity and transparency and are expected to lead to reduced expenses with respect to the administering and monitoring of private equity investments. ILPA has begun their initiatives with generic templates for capital call and distribution notices. Templates for other key reports such as partner capital statements, financial statements and portfolio analytics will follow. If adopted as anticipated, these templates will serve as a best practices reporting guideline that should significantly normalise investor reporting. Investors demand increased transparency from alternative managers to gain a better understanding of managers’ sources of returns. According to the recent survey, investors rank P&L attribution, including by sub strategy, as the most important transparency requirement.
Managed accounts
Allocations to managed accounts are going to increase. Many innovative alternative investment managers are seeking to generate alpha from an increasingly diverse universe of strategies, asset classes and geographic locations. Managed accounts, and managed account platforms, are also becoming more commonplace to address the institutional demands for more liquidity and transparency. The above-referenced survey highlights that 23 per cent of all institutional investors plan to increase allocation to managed accounts with a preference for external non comingled products. These platforms present operational challenges, which are leading many managers to outsource operations to institutional administrators such as Deutsche Bank, who have sophisticated technology platforms built to administer these platforms.
As alternative investment funds become more mainstream and more subject to the requirements and preferences of regulators and investors alike, how will managers address these changes while still doing what they do best? The Cayman Alternative Investment Summit provides a forum for alternative investment managers to discuss this and other timely topics with their peers and advisors; its agenda combines a broad base of topics with a narrow focus on the challenges and opportunities now facing this audience.
Deutsche Bank is proud to be a platinum sponsor of Cayman AIS, and we look forward to contributing to the summit’s thought leadership by offering innovative ways to be more efficient in today’s evolving market.
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