Pension funds face a tough dilemma. The persistent low interest rate environment and uncertain markets mean investors have been struggling to source decent returns from traditional asset classes. At the same time, aging populations and a shrinking workforce are making it harder for pension schemes to meet their future obligations.
To bridge the gap, many funds are diversifying into alternative assets. According to a recent State Street global pensions survey, 51% of respondents plan to boost their exposure to funds of hedge funds over the next three years, while 50% will increase exposure to real estate and 46% to private equity.
Yet the potential for higher returns brings higher risks – an area where many pension funds are currently ill-equipped. Of the survey respondents, 46% say they lack real transparency on the risks associated with alternatives. Only 26% are highly confident in the reliability and accuracy of their risk data, and just 23% believe their board has a high level of expertise on alternative assets.
Diversification demands the right data
The State Street report goes on to note that “transparency of data on alternative assets is imperative to support higher-risk/return strategies.” To evaluate portfolio risk, funds need the ability to “aggregate and normalize data across all asset classes including private equity, hedge funds and derivatives while providing exposures, sensitivities and stressing the portfolio by asset type or in aggregate.”
Reliable, accurate and timely data will be crucial then to pension funds’ successful shift into the alternatives arena. Yet as a study by investment management consultancy Investit highlights, many firms are grappling with manual and inefficient data processes to support their alternative investments.
Lack of standardization and centralization of counterparty valuations and reference data supporting the alternatives market, the difficulties of integrating and cross-referencing the necessary data, and a shortage of relevant expertise pose particular data management challenges.
Faced with these challenges, Investit Consultant Jerry Slason points to the opportunity “to use a managed data service to provide a cost-effective approach that is scalable and improves the time-to-market for new investment strategies.”
Leveraging a professional managed service allows:
- Significant improvements in data management costs and scalability.
- Investment and risk team members to have ready access to the high quality, comprehensive and transparent data they need, while freeing them to concentrate on core tasks.
- Benchmarks to be added quickly and easily to support new initiatives and strategies.
With a trusted data services partner, pension funds’ plans for meeting their long-term liabilities have a much greater potential for success.
For more information on how RIMES can help support your alternative investments data requirements, please contact us.