More asset owners are leveraging technology to take the grunt work out of and improve transparency in alternatives managers research, especially as the asset class is gaining favour among investors.

The entire investment management industry is evolving at breakneck speeds, including the process of identifying proficient external asset managers, and monitoring an increasingly complex portfolio. More institutional investors are digitising the operational due-diligence framework so that potential risks and compliance issues are flagged in a timely way.

Giulia Baiocchi

They are looking to dedicated technology platforms to perform robust quantitative analysis of large data sets and dig into qualitative information, according to Giulia Baiocchi, Asia Pacific director at DiligenceVault.

“The goal here is not only to boost the success rate of selecting the best managers, but also to minimise costly errors arising from operational and manager-related idiosyncratic risks,” Baiocchi said.

These platforms help investment managers collect and organise their content and data to reduce time spent on manual processes. With the ability to digitise and automate request-for-proposals (RFPs) and due diligence questionnaires (DDQs), managers researchers can increase the scale of the initial screening processes.

Asset owners and capital allocators can stay more informed, garner the best insights and drive faster decision-making by utilising a systematic way of prioritising key data points via flags and scoring systems.

In this way, they can improve the quality of manager monitoring, get ahead of known issues and strengthen clients’ trust by bringing timely information to the table.

The adoption of technology in manager research is particularly important for alternatives investments, which require a more robust vetting process as they are more nuanced, customised, and complex than traditional assets.

Alternatives also carry much higher liquidity risks, particularly in the private equity space, where investors’ capital is locked up for longer periods, making it harder to cash out when markets go south, or when a manager is a subject of idiosyncratic risk factor.

“Given the growing prominence of alternatives in the investment portfolios, asset owners should take a closer look at their manager due-diligence framework and reevaluate whether their current processes can effectively and efficiently screen for, research, and monitor these opportunities,” she said.

Asset allocators are also encouraged to pay close attention to quantitative as well as qualitative factors in these evaluations.

Qualitative factors such as a manager’s philosophy, culture, personnel, and business processes can most effectively predict managers’ future performance, according to a 2020 survey from the Chartered Alternative Investment Analyst Association (CAIA).

“All of this underscores how crucial it is for asset owners to leverage technology to minimise burdensome manual processes and unlock access to structured, usable and timely data as it allows them to devote time to gain better knowledge of their managers,” Baiocchi said.

THE RISING APPEAL OF ALTERNATIVES

Despite the severe economic and social impact brought on by the Covid-19 pandemic, alternative investments have grown significantly in the Asia Pacific (Apac) region.

Alternative assets under management (AUM) in the region totalled $3.3 trillion in 2020 and is expected to more than double to $6.9 trillion by 2025, thanks to a boom across private equity, hedge funds, and infrastructure assets, according to research from PricewaterhouseCoopers.

The factors fuelling the popularity of alternatives in Asia are similar to those underpinning the dramatic evolution in Asia’s demographics and economies. For instance, urbanisation in the region has led to a surge in the demand for infrastructure, driving private investments into the sector.

On the other hand, China’s rapidly liberalising financial services sector will be fertile ground for deal-makers over the next five years, according to Preqin. In the Apac region, venture capital is expected to remain one of the fastest growing areas through 2025, with internet and technology investments poised to attract the most interest within that asset class. 

Current market conditions are conducive to alternative investing as well. The Covid-19 era has ushered in ultra-low interest rates and higher equity-market volatility, a combination that has spurred many institutional investors to look for loftier returns and diversification.

According to an ongoing survey conducted by AsianInvestor’s Asset Owner Insights, most institutional investors in the region are planning to increase their allocations to alternatives.

When asked about the reasons for investing in alternatives, 35% of them cited absolute returns, followed by long-term historical outperformance over public investments (27%) and portfolio diversification (20%), according to preliminary results of the survey from about 50 asset owners in Apac.