How Some Alternative Funds Producers are Building Infrastructure to Scale Efficiently

By Cynthia Stephens, VP of Marketing, ByAllAccounts on Thursday, September 18th, 2014

In the mid 1980s the costs of mutual fund trades were high. Over the past 25 years through services like Fund/SERV® from The Depository Trust & Clearing Corporation (DTCC), these costs have shrunk dramatically to mere pennies.  DTCC’s Ann Bergin thinks the opportunity to increase operational efficiency in the alternative investments space is even better than the mutual fund market transformation.

Morningstar, Inc. and Barron’s recently released highlights of their annual national survey examining the perception and usage of alternative investments among institutions and financial advisors.  The research shows that mutual funds continue to grow as the vehicle of choice for accessing alternative strategies.

Ann Bergin, from her vantage point at DTCC, tells me she sees a trend toward liquid alts and alternative type strategies. This is being driven by access to return that has been dampened in the fixed income market as well as from clients continuing to increase their allocation to alternatives.

“Funds want distribution through broker dealers and RIA’s seeking alternative investments for their high net worth (HNW) and institutional clients,” says Ann.  “It’s the environment that we’ve been in where we’re seeing a convergence of HNW investors who are beginning to look more like institutional investors.  There’s a lot of activity that is bleeding over into hedge funds, funds-of-funds, managed futures, commodity pools and real estate.”

With growth, come growing pains.  According to Ann the challenge with the influx of funds from more sources is to make sure it doesn’t strangle an organization’s operational efficiency or cause costs to skyrocket.

Consider Ann’s example: If you were selling a fund to 150 clients and with recent growth you are now selling the same fund to 1,500 clients, the infrastructure required to support the fund has grown exponentially.  For instance, with this growth comes greater variety in the portfolio accounting platforms from RIA and family office clients that need data for client reporting.  These clients are looking for access to alternative funds research for vehicle selection and alternative funds data with less manually-intensive performance reporting.

Ann believes the industry is at a turning point where a scalable, automated infrastructure with transparency for audit purposes is needed and will revolutionize operational efficiency.

Ann points to a similar time in the mutual fund industry when “the market skyrocketed with the popularity of the funds.”  The proliferation into the retail market was so rapid, she says, that the industry needed to automate to sustain growth and build it to the $multi-trillion business it is today.

“The scalability advantages as automation replaces manual processes are significant,” Ann says. “The opportunity to grow the business, both for the funds and their distribution partners, is combined with a markedly improved operational environment that reduces cost and, maybe more importantly, reduces risk.”  

Clearly, Ann and I have unique vantage points on the use of automation to drive operational efficiency gains — our wealth management clients are already using our respective automation technologies.  Funds on DTCC’s  Alternative Investment Product  (AIP) Platform  have seen decidedly improved processing efficiency. 

Alternatives funds using ByAllAccounts to aggregate account data for automated delivery to portfolio management systems are making their products attractive by eliminating the manual data entry otherwise required by advisors for performance reporting.

Whether you believe bitcoin will be the next big alternative investment in the future or something else is on the horizon, one thing is certain:  we are being asked to do more with less while still delivering the same level of client service (internally and externally) that is expected.

Our individual business models will offer clues on how to best solve these operational efficiency challenges.  Whether you choose to add headcount, use technology, or find another solution, my advice is: be proactive not reactive.

Ann Bergin is Managing Director and General Manager, DTCC Wealth Management Service that delivers a broad range of innovative transactional and information services to automate, standardize and centralize processes to create efficiencies and reduce cost and risk for the mutual fund and alternative investment products industries. Fund/SERV and AIP are service offerings of National Securities Clearing Corporation, a DTCC subsidiary. Cynthia Stephens is the Vice President of Marketing for ByAllAccounts, a Morningstar company that provides innovative data aggregation technology for financial applications.

You might also be interested in:

Morningstar’s Quarterly Alternatives newsletter

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