Institutional investors and in Asia are likely to increasingly turn to financial technology to figure out exactly how specalist alternative asset managers charge their fees, as investing into alternative assets continue gaining favour, predict market experts.
Investors around the world are ploughing money into alternative assets— typically considered to consist of private equity funds, real estate managers and (decreasingly) hedge funds, according to a report released by Northern Trust in June 2017. This includes asset owners across Asia, most of which want to raise alternative investments because they can often offer double digit returns.
But making such investments isn't cheap. Alternative fund managers charge hefty fees, often 2% of committed funds a year and around 20% of investment profits, plus they add charge extra costs into their bills for services ranging from marketing expenses to legal fees, without always making this clear. That's a problem for regulators in countries such as the US and Australia, which demand that state pension funds understand exactly how much they must pay for alternative investments.
The desire for more transparency around alternative fee charges is beginning to emerge in Asia too as more investors put money into these funds, said Serge Boccassini, senior vice president for global product management of Northern Trust.
“The Asian market is pushing hard for that [alternative fund manager fee transparency] because they are very focused on understanding what’s truly [inside the] fee that they are paying,” he told AsianInvestor.
Justin Ong, partner, asset and wealth management industry leader Asia-Pacific at PwC, said the fee can cover many cost beyond management fees and carried interest. This can include marketing expenses, travelling costs that managers incur for looking for investments, brokerage costs, and legal costs.
Because there is so little transparency around the fees it is difficult to determine whether these costs should be borne by the asset managers or their clients, he added.
This is where financial technology companies are playing a role. Boccassini said investors are increasingly looking to employ fintech companies to deconstruct the fees in alternative investments and make clear what is being charged.
The fintech companies do so by creating financial analytics software and load in the enormous amounts of transactions from the alternative asset managers. The programmes then recalculate and verify the fees based on the terms in the original contracts, he added.
Adeline Tan, head of advisory at Mercer, agreed that fintech solutions have a role to play adding transparecy to alternative investment funds. She told AsianInvestor that digital solutions such as blockchain, a mass-ledger updating technology, can better aggregate and record transaction information. That can help to present fees in a more transparent way to end-investors.
Increasing fee transparency would pressurise alternative funds to carefully consider what they charge their end customers for. It could also raise competition between funds, and might lead them to cut the amounts they charge.
Red tape solutions
Fintech could play other roles in addition to alternative fee deconstruction, Boccasini argued. He noted that another area gaining traction is so-called regtech—technology that helps a company to fulfill the regulatory and compliance needs.
This should ultimately benefit investors, who have to conduct due diligence on investment managers and understand the process they respond to the regulator, he said.
“If it is very manual, there will be some concerns because operationally there will potentially be some problems with that investment manager,” he said. “If they utilise software that everybody utilises to produce the forms and delivers the reports to the regulator and it is done in an automated fashion, there will be a lot less risk,” he said.
But there is a long way to go in the Asia region. Mature markets in North America and Europe are increasingly introducing automated regulatory support. But Boccassini noted that “it’s a tougher one” to do so in emerging markets, as they generally have less developed technology, and regulators are less familiar with using technology solutions to collect data and enforce rules.