Analytical Insights - Q4 2014

Analytical Insights is a quarterly publication providing clients with investment information that can be used in the process of monitoring global assets.

A Message from Debra Baker

Managing Director, Head of Global Risk Solutions
BNY Mellon Asset Servicing

Alternative Investments

As we begin 2015, we continue to see increasing allocations to alternative investments such as private equity, real estate and hedge funds, and increasing awareness of the complexities involved in managing the various risks of these asset classes.

Global Risk Solutions supports more than 1,000 institutional investor clients across the globe, and we notice recurring themes in the discussions we have with our clients. Across the range of alternative investments, there are common concerns around liquidity, transparency, operational and reputational risk. Many investors are interested in more direct relationships with their alternative investment managers to facilitate due diligence and transparency. These direct relationships may lead investors to recognize the need for additional operational infrastructure to support the management of these non-traditional investments. The infrastructure needs of different asset classes vary and require different tools and expertise. Private equity investors comment on the increasing administrative burden associated with a growing number of Limited Partnerships, and the need to understand the specific investments within the partnership as well as investor-specific benchmarks.

Likewise, hedge fund investors are increasingly responding to requests to demonstrate due diligence around operational and business risk, as some prominent public fund investors are moving away from hedge funds and other investors are increasing hedge fund allocations. We recently asked a group of clients if the CALPERS announcement regarding their decision to move away from hedge fund investments would cause them to reduce their allocations to hedge funds, and the clients with current allocations to hedge funds consistently responded that they would not expect to reduce their allocations. One trend we notice relative to hedge fund investing is the rise of dedicated managed accounts as an approach to address many of the transparency, liquidity and control issues inherent in traditional commingled hedge fund structures.

We also see some institutional investors using derivative strategies as a way of addressing tactical asset allocation adjustments. Many of these investments have regulatory reporting implications that are changing quickly, introducing additional aspects to risk management requirements that are already challenging.

We are interested in discussing your approach to these issues and how we can partner with you to help you make progress toward your specific objectives.

Debra A. Baker