The global health crisis of 2020 brought an abrupt halt to the longest bull market on record. And while markets around the globe managed to rally, volatility, uncertainty, and caution remain the watchwords of the new investment environment. Given this level of uncertainty, investors and traditional asset managers are increasingly looking to alternatives, such as hedge funds, private equity, private debt, infrastructure, and real estate, for both diversification and alpha generation.
Diversification for outperformance
Expanding into new asset classes and fund structures offers big opportunities, but requires a measure of business transformation. Having the operational expertise and infrastructure in place to manage multiple asset classes, deliver high-quality investor servicing, meet compliance requirements, and manage it profitably is paramount. Firms that can demonstrate their capabilities are well-positioned to take advantage of investors’ growing appetite for diversification.
The point of diversification is to offset the risk of asset class concentration with the goal of delivering returns that outperform key market benchmarks. As traditional asset managers expand into alternatives, many are also adopting long-standing alternative fund strategies such as the use of derivatives for hedging purposes—whether simple equity and FX futures and options, or more complex OTC products such as swaps and swaptions. Though this activity may be relatively low volume and focused on a few clients, investors will likely expect some derivatives capabilities on the part of their managers.
The operational foundation for a multi-asset environment
To meet the demand for diversification on the part of asset owners, and thus retain and grow AUM, the first challenge for asset managers is to develop (or acquire) the investment expertise to manage these often highly specialized assets. An equally important, but often overlooked, consideration is whether their technology platforms and operations teams can support the intricacies of accounting for, and reporting on a diverse asset mix.
What does it take to add alternatives to the asset mix for a diversified offering that is seamless to the client? A solution that manages, accounts for, and reports on multiple asset classes within a single platform, with capabilities including:
- Asset class coverage
- Granular investor accounting
- Automatic reporting
- Automated rebalancing
Without the right systems and skills, firms’ forays into alternative asset classes typically involve considerable manual processing, which is inefficient and invites significant risk. Successfully expanding into other asset classes requires a scalable operational infrastructure to handle higher volumes, more detailed reporting, and more complex accounting.
For more on the new normal in asset management, download our whitepaper, Meeting the Demand for Diversification: The operational foundation for a multi-asset environment, or to learn more about Geneva®, request a demo.