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How Data is Enabling Hybridization to Flourish at Hedge Funds

As the line between public and private market strategies continues to blur, the role of data in supporting managers’ operational and investment processes is becoming increasingly important. Broadridge takes a look at how asset managers are leveraging data when running hybridized portfolios.

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A Funds Market That is no Longer Black and White

Ever since the 2008 financial crisis, managers have been looking for ways to both diversify their revenue streams and distribute their funds to wider investor audiences. Many have since chosen to adopt new and different strategies to supplement their existing fund suites.

Sparked by a string of disappointing returns and heavy client withdrawals, a number of long-only managers and hedge funds launched private equity vehicles. Up until recently, private equity had outperformed public markets and attracted record amounts of institutional money in the process. By shifting into private equity, these asset managers hoped to counteract some of the challenges facing their flagship strategies.

Conversely, some private equity firms have diversified their businesses as well, by launching open-ended fund products. By moving up the liquidity spectrum, managers thought it would help them obtain additional returns, and potentially even attract retail money. Looking ahead, experts anticipate that more managers will start launching private credit funds. This is because private credit is one of the few strategies that is set to benefit from the rising interest rate environment.

Enhancing Operations Through Data

By having a thoughtful and intelligent data strategy within their operations, fund managers will be able to gain a competitive edge over their peers.

Hybridization has resulted in portfolios becoming more complicated as managers are sitting on a combination of both public and private assets. At the same time, managers are receiving increasingly frequent and complicated reporting requests from clients and regulators, which is putting further strain on their businesses and operations.

To navigate these growing complexities, firms are having to rethink how they oversee their data. One of the biggest challenges facing hybrid firms is that the investment and operations teams focusing on different strategies will frequently work in silos, creating inefficiencies, especially around how data is managed.

Often, data is not centralized in hybrid fund structures, and this compartmentalization can have a detrimental effect on the ability of firms to consolidate and organize data – potentially hindering their investment, risk management, compliance and reporting activities.

It is vital that data across multiple strategies is aggregated in one place, so firms can interrogate it seamlessly and holistically. Again, this will make it easier for managers to keep track of their investments and operations, thereby reducing the likelihood of errors and mistakes creeping in.

Such improvements will also help managers meet the growing reporting requirements expected of them by their investors and regulators. In this highly competitive fundraising environment, those managers which can provide granular levels of reporting to clients on a timely basis, will be in a much stronger position to win mandates. With costs spiraling upwards too, access to data from a single location can also enable managers to obtain operational efficiencies, allowing them to further streamline their businesses. 

It is critical, however, that fund managers engage with providers which are well versed and experienced in supporting their clients’ data needs across multiple asset classes, and in both public and private markets. 

Alternative Data as a Return Enabler

Amid this hybridization, managers’ appetite for alternative data sets is growing too. Managers – especially those investing in liquid public markets – want more than just basic security terms and pricing data, but so-called “alternative” data sets, which can enable them to gain a competitive performance advantage over their peers.

So what exactly is alternative data?

Alternative data is a catch-all term, but examples of it might include analytics based on satellite imagery, social media commentary, product reviews or aggregated credit card transactions. For instance, a manager looking to gain insights into the revenues at say – Walmart – might leverage satellite imagery to count the number of vehicles using the parking lot, and from that compare how busy the store is relative to previous years or months.

However, it is essential managers work only with high-caliber alternative data providers, who take compliance seriously and can demonstrate the lineage of the information which they sell. Additionally, managers need to validate that the information they receive from these providers is accurate, as error-strewn data could potentially result in firms incurring severe losses.

At a time when returns (and investor mandates) are difficult to come by, alternative data solutions could potentially help managers supplement their performance.

Progress is Happening

Buy-side firms recognize that they need to make technological enhancements if they are to improve how they manage their data. According to the latest Broadridge 2023 Digital Transformation study, 66% of firms are either making significant or good progress on developing an integrated data platform providing access to data across all departments.

With firms adopting hybrid strategies, data is going to become a major driver underpinning their success, both on the investment and operations sides of the business.

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