Managers respond to evolving needs of asset owners

A post-crisis regulatory shift towards transparency has effectively given asset owners greater power, and their growing demands are driving asset managers to reconfigure their operating models.

The renewed emphasis on transparency is hardly surprising, given the liquidity crunch that alternative investors suffered in the aftermath of Lehman Brothers’ collapse in 2008, compounded by the multitude of negative news stories about ponzi schemes and insider-trading.

In a webcast with AsianInvestor, two alternative fund administration experts from Northern Trust – Paul Finlayson, head of private equity product, and Peter Sanchez, chief executive of Northern Trust hedge fund services – addressed the major issues facing Asian asset owners in the administration of their alternative asset portfolios.

“Investors in Asia Pacific want to understand how the value of the asset changes, given daily market movements, or sensitivity [of the assets] to the market,” noted Finlayson during the discussion. “Risk management today means being able to anticipate what might happen to the portfolio.”

In the private equity space, Finlayson pointed out that asset owners were finding it difficult to hire talent to keep up with the complexities of maintaining daily portfolio valuations, pressure that comes from the need to satisfy the requirements of both regulators and end-investors.

Managing liquidity risk is a challenge for institutional investors that invest in private equity or hedge funds. Cash management difficulties can arise from various events, including gating and lock-ups, and they require sophisticated systems to be able to cope, noted Finlayson.

In the hedge fund arena, Sanchez added that the revelation of numerous frauds, such as the Bernard Madoff scandal, had heightened investor concerns over counterparty credit risk.

Further, the post-crisis liquidity challenge faced by fund-of-funds investors has led to them to seek help from fund administrators to better understand the liquidity terms of the fund itself, and the potential credit risks stemming from co-investors.

So managers of alternative assets have had to evolve their operating models. Investors are focusing on operational infrastructure and controls on their hedge fund managers when reviewing current or potential alternative investments, Sanchez observed.

When evaluating managers’ operating models, asset owners need to differentiate in terms of scale. “Not all investors recognise that the nature of outsourcing evolves based on size of the fund, the maturity and age of the fund,” he said. “This is of special relevance for pan-Asia funds, given their smaller assets under management.”  

Responding to questions from the online audience, both Sanchez and Finlayson outlined what Asian asset owners and managers needed to consider when evaluating mid-office and back-office operations; and the pros and cons on various outsourcing and insourcing models.

To listen to the webcast, please click here.