Alternative Investment Firms Thrive on Information.
For private equity fund-of-fund and hedge fund firms, information is their source of competitive advantage in the investment marketplace, and the 2008 financial crisis has only increased the importance of information. Measuring risk exposure and valuing investment positions with multiple scenarios/perspectives, however, can be cumbersome when data is spread across an organization and not well governed. The difficulty compounds as the variation of investment classes, the size of the firm, and the amount of data increase.
Investors and Regulators Demand More Information.
Three key events during the recent economic downturn permanently altered the alternative investment landscape and changed investor sentiment towards these organizations.
- The subprime mortgage crisis left the general public frustrated and looking for a responsible party. Media outlets responded by blaming the financial services industry for the credit crunch and resulting recession, and government officials began openly campaigning for stricter regulation in order to placate angry constituents.
- The Madoff Ponzi scheme showed people what happens when they take a “black-box” approach to investing—eschewing due diligence when returns are consistently high can lead to a disaster. Investors now expect easily accessible information that enables them to understand how their investments are performing and how allocation decisions affect their risk exposure.
- The downturn brought a combination of low returns and negative publicity, leaving investors to question the premium costs associated with these firms. Now more risk-averse institutional investors, and the individuals they represent, are demanding greater transparency.
With the advent of new regulation and calls for greater transparency, hedge funds and fund-of-fund management firms now face the challenge of providing consistent performance analysis and reporting capabilities across their entire operations. And, they need to accomplish that while maintaining competitive advantage, intellectual property, and their legal agreements. Firms require reporting and analytic tools that are flexible and robust enough to meet all of these demands.
Key Challenges Facing Alternative Investment Firms.
These internal and external needs have only increased the appetite for information in the alternative investment space. To have a realistic chance of meeting them, managers need to develop a data governance strategy and to implement a nimble and rich data warehousing platform.
Alternative investment firms participate in such a wide range of assets for which valuation can be challenging. Managers within a firm may model and value assets differently than others. Given the spectrum of investment, asset classes, and manager preferences, defining an overarching valuation methodology provides a firm with consistent valuations that are crucial to its overall success.
Managers have a vested interest in concealing their strategies or key intellectual property—externally and, even sometimes, internally. Protecting this information is essential to maintaining competitive advantage. Managers also may be contractually obligated by their partners and investors to provide an additional layer of secrecy in order to safeguard sensitive information.
Transparency is becoming an important and visible issue for investors and regulatory agencies, alike. In an increasingly connected world, people continuously seek the most action-ready data available to help them make better decisions. How people interact with this data also is changing significantly.
Business Intelligence Bridges the Gap.
Business intelligence can help meet the evolving and growing appetite for information.
Developing the right business intelligence reporting and analysis system can be challenging. There are many stakeholders, and each undoubtedly values certain features more than others. Solving this optimization problem requires a flexible reporting solution that enables the organization to provide both internal and external stakeholders with the right level of information. Critical elements include data governance and a data warehouse.
Data governance is the first major step toward implementing effective business intelligence processes, and it requires a large-scale effort to build consensus among a firm’s senior managers with respect to core system objectives and sources of data. Data governance attacks the core problem—it creates a system of policies for data validation, quality assurance, maintenance, and analysis across an entire organization. Ultimately, it allows alternative investment firms to gather information effectively from their distinct business groups and to align it with common reporting and analytics goals.
The next major step in the process is to architect a data warehouse. A data warehouse delivers on this strategy by allowing separated data to exist in a unified system of record. It enhances reporting capabilities by providing a scalable platform for analysis and reporting that can grow effectively with the needs of the organization.
In this way, business intelligence bridges this gap. Data governance brings together once-disparate data. Then, a robust data warehouse and reporting program enable effective business intelligence by providing key stakeholders with scalable and flexible tools to better understand and analyze data relevant to them.
West Monroe Partners combines deep experience in the alternative investment arena with substantial business intelligence credentials to help you meet evolving information and reporting needs. For more information, please contact us.