Dynamo’s ongoing primary research with LP and GP investors continues to highlight plans to increase allocations to alternative assets. As they seek to capture the potential for higher returns and greater diversification, many encounter a long-held challenge: capturing accurate and timely data from often-opaque sources for analyzing alternative assets’ performance.
A multitude of metrics, analyzing risk, and wrangling data are three key challenges alternative investors must solve for.
Challenge: An “Alphabet Soup” of Metrics
How does your firm measure performance? IRR? XIRR? MIRR? TWR? MOIC? DPI? Alternative assets have a multitude of potential metrics, especially when compared against public market investments. The appropriate measures can depend on asset class, your strategy, the investment vehicle, and who is managing the investment. Different metrics serve different purposes.
It’s not about which metric is “best,” but which are meaningful to your investors, firm or investment board – and are in alignment with your investment process. Investors – your clients or stakeholders – are the most important audience for performance and risk analysis. Ask the KYA (“Know Your Audience”) question: how can investors understand what matters and communicate it a format that is shareable, digestible, and comparable to other assets?
Challenge: Analyzing Risk in Private Assets
Though there’s are a myriad of risk methodologies for analyzing investments, and many of the public markets metrics (i.e. MPT statistics) aren’t reasonable for alternative investments. Portfolios that have a mix of both public and private assets can present a particularly complex puzzle for piecing together the full picture of risk. When Dynamo surveyed a global audience of limited partners in 2023, a significant percentage – 34% – reported that illiquid private asset classes aren’t factored into their risk framework at all.
Simply put, when you have more data, there is more to calculate. The data points for public investments are more frequent and observable, making more robust risk analysis possible. Private investments have less readily available data, and sometimes, the fewer data points can paint a picture that looks less risky.
For greater risk insight, Brad Sinclair of CPP Investments recommends that alternative investors gain more holistic observations that also include qualitative measures such as operational risk and reputational risk. John Simpson of Dynamo partner The Spaulding Group (TSG) agrees, pointing to how much risk measurement often depends on valuations. The valuation of alternatives is often more difficult and subjective, making alternatives risk more difficult to calculate solely with quantitative measures.
Challenge: Getting Timely and Accurate Data on Alternative Investments
Research by TSG and Dynamo confirm what alts investors already know too well: wrangling alternatives investment data is a big challenge. TSG research shows data lag is a common problem when it comes to reporting the performance of alternatives, with a three-month lag time frequently cited. Further compounding the issue are the challenges of document collection and data extraction, the top obstacle cited by the LP investors in Dynamo’s 2023 survey.
Alternative investors walk a tightrope that balances the need for timely data against accuracy. How can investors balance two goals that seem at odds, getting their arms around the best information possible in order to make important decisions quickly?
The solution is automation. Manual content sourcing and data extraction are slow and labor-intensive and can further increase undesirable reporting lag times. Today, it’s even possible to leverage automation to capture and process both structured and unstructured data.
Investors can automate each step of the data acquisition process – even when data comes in from a multitude of sources and in disparate formats. Natural language processing and machine learning accurately organizes, extracts and validates data, which reduces human errors and increases both speed and accuracy of the entire process.
What’s more, the depth of that data can be augmented with additional third-party sources. Both quantitative and qualitative information from top-tier sources can greatly enrich investor metrics and portfolio insights without increasing time or burden on the investment team.
Analyze and Measure the Performance of Alternative Investments
Learn how industry thought leaders evaluate the performance of their alternative asset portfolios in this engaging discussion that includes real-world case studies.
Mike Slemmer, CFA, is LP Sales Director at Dynamo Software, covering parts of the U.S., Canada, and South America. Mike has over 30 years of sales and general management experience in investment and performance measurement and risk technology at Thomson Financial (now ThomsonReuters), SS&C, and FundCount. Over the past 3 years he’s served as a judge for the Family Wealth Report Awards and WealthTech Americas Awards, and has spoken at many investment technology forums. Mike is a CFA charter holder. Connect with Mike on LinkedIn.