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SimCorp Alternative Investments Challenges

Traditional assets like stocks and bonds have long been the cornerstone of portfolios. However, as investors seek to diversify their holdings, manage risks, and pursue higher returns, alternative investments have emerged as a dynamic and increasingly pivotal segment of the market.

Alternative investments comprise a wide array of non-traditional asset classes that extend beyond the realm of stocks and bonds. This category includes investments such as private equity, real estate, hedge funds, private debt, commodities, infrastructure, and more. Their appeal lies in their potential to offer unique opportunities, reduced correlation to traditional markets, and the ability to navigate through various economic cycles.

Over the past few decades, the growth of alternative investments has been nothing short of remarkable. A recent PwC report from July 2023 estimates that Global AuM invested in Alternatives will rise from $12.8tn in 2018 to over $22.3tn by 2027 and already had a compounded annual growth rate of 8.9% between 2018 and 2022.

A report from Preqin back in October 2022 confirms the overall growth expectations and further notes that investments in alternatives is expected to reach a staggering 15-20% of Global AuM by 2026.

A report from EY in 2022 notes that alternative fund managers focus is “on increasing their product offerings in areas such as illiquid credit, real estate, private equity, venture capital and opportunistic or special situations, while being responsive to opportunities arising in the market. In addition, managers are expanding distribution of their existing products to new customers, such as retail investors, and are incorporating differentiated investing criteria within an existing strategy, such as private market investing within a hedge fund". In other words, more products and more complexity is coming and they note that 33% of private equity managers anticipate increasing these offerings.

Investors, from institutional entities to individual savers, are recognizing the advantages of diversifying their portfolios with these unconventional assets. This surge in popularity can be attributed to several factors, including a quest for higher returns in a low-yield environment, a desire to reduce vulnerability to market volatility, and the development of new and innovative investment strategies.

SimCorp alternative investments visualized as a world of buildings, bridges and infrastructure.

In this exploration of alternative investments, we will take a quick look at some of the challenges the industry faces, the importance of data and scalability to manage growing volumes and what SimCorp has done to address these challenges.

Industry Challenge

With the rapid growth in alternative investments, comes the challenge that many investment companies find themselves lagging behind, grappling with a fragmented IT infrastructure. The challenges include:

Data availability the lack of access to timely and accurate information can hinder decision-making, risk assessment, and overall portfolio performance.

Scaling alternative exposure seeking diversification beyond traditional assets has become crucial. However, doing so efficiently and effectively poses challenges, especially when dealing with a diverse range of alternative investments.

Liquidity management is essential to meet investor redemption requests and seize emerging opportunities while maintaining portfolio stability.

Automation streamlining routine tasks, reduces errors, and frees up valuable time for strategic decision-making.

SimCorp Alternative Investments at a glace

Alternative investments have not gone unnoticed by SimCorp. The work started in 2015, and the growth since then has been impressive. This is evident in a few ways. First and foremost, more than 25% of SimCorp’s clients are using the alternative investments functionality. Furthermore, at SimCorp conferences in 2023, polls conducted revealed just how significant this area has become. At the International User Summit in April, it emerged as the second most important topic and at the North American Summit in September, it ranked among the top five topics, highlighting the growing interest and relevance of alternative investments.

Here is a quick overview of some of the key features SimCorp’s Alternative Investment Manager offers:

Seamlessly integration with the Investment and Accounting Book of Record (IBOR & ABOR), providing a comprehensive view of the investment data in one platform.

Advanced analytics, allowing clients to gain deep insights into their portfolio's performance and risk.

Look-through functionality, enabling you to see the underlying details of your investments, enabling clients to assess factors like currency exposure across different assets.

Cross-asset visibility, providing a comprehensive view of both liquid and illiquid assets, allowing clients to analyze and manage them side by side.

Detailed drill-down, facilitating in-depth analysis by enabling clients to drill down into underlying asset details, offering an understanding of their portfolio's composition and characteristics.

Competitive Advantage

While investing in alternative assets can be rewarding, managing them can be a complex process. One of the main challenges is to answer the question: what is the minimum amount I should invest to maintain or achieve a certain percentage of exposure to alternative investments over a specific number of years?

The answer will vary depending on several factors, including investment goals, risk tolerance, time horizon, and the specific alternative investments being considered. SimCorp has tried to address this by these 4 main areas described in the following sections.

Achieving Target Allocation

The first step in any investment process is defining your target allocation. This involves determining how much of your portfolio you want to commit to alternative investments over a certain period. SimCorp has introduced pacing plans to help address this. A pacing plan is a schedule for investing in alternative investments over time. It can help you to reach your target allocation in a systematic and disciplined way.

With information on the target allocation to alternatives, the time horizon over which to reach that target and the expected returns, a pacing calculator can create a schedule for investing in alternatives over time. This can help you to invest in a disciplined way and to avoid making emotional investment decisions.

For example, let's say that you have a target allocation of 20% to alternative investments and you want to reach your target allocation over a period of 5 years. If you have a current allocation of 10% to alternative investments, then you would need to invest an additional 2% of your portfolio in alternative investments each year.

Commitment Efficiency and Diversification

Diversification is a key aspect of any investment strategy. But how can you ensure your approach makes sense? SimCorp has introduced commitment efficiency to measure how effectively your investments are spread across different assets. It helps answer the question, “How diversified am I really?”

It is calculated by dividing the number of alternative investments in your portfolio by the total number of alternative investments that you could invest in. A commitment efficiency of 50% means that you are invested in half of the alternative investments that you could be invested in.

A high commitment efficiency means that you are well diversified, but it also means that you have a lot of money invested in alternative investments. If you are not comfortable with a high level of exposure to alternative investments, then you may want to consider reducing your commitment efficiency.

Regularly reviewing your commitment efficiency can help ensure your portfolio is well-balanced and aligned with your investment goals.

Cash Flow Management

Cash flow management is another crucial aspect of investing in alternatives. You need to consider, “How much cash do I need on hand for the next quarter?” SimCorp uses tools like Capital-Call-at-Risk and Cash-Flow-at-Risk to help clients estimate future cash needs and manage liquidity risk.

Capital-call-at-risk is the amount of money that you may need to invest in alternative investments over the next quarter, whereas Cash-flow-at-risk is the amount of money that you may need to withdraw from alternative investments over the next quarter.

To calculate your capital-call-at-risk, you will need to know the following:

  • The amount of money that you have invested in each alternative investment

  • The minimum investment amount for each alternative investment

  • The expected capital calls for each alternative investment over the next quarter

To calculate your cash-flow-at-risk, you will need to know the following:

  • The amount of money that you have invested in each alternative investment

  • The expected distributions from each alternative investment over the next quarter

Stress Scenarios

Finally, it’s important to consider potential stress scenarios. These are hypothetical scenarios that are designed to test the resilience of a portfolio. They can be used to assess the impact of different market events on your portfolio, such as a pandemic, a recession, or a stock market crash.

To create a stress scenario, you will need to identify the market events that you are most concerned about. You will then need to estimate the impact of these events on your portfolio. SimCorp has several stress scenarios that can be applied to alternative investments to stress test your portfolios on your expected market scenarios.

For example, you may want to create a stress scenario that assumes a 20% decline in the stock market. You would then need to estimate the impact of this decline on your portfolio.

Stress scenarios can be a helpful tool for understanding the risks associated with your portfolio. They can also help you to identify ways to mitigate these risks.

These 4 points are the strength of alternatives in SimCorp: this can be managed in real-time on a daily basis and does not rely on monthly or even yearly processes to execute.

SimCorp’s Collaborative Approach

SimCorp acknowledges that it's not practical to cover every aspect of the alternative investments space comprehensively. Recognizing the need for specialized solutions that extend beyond investment-related functions, SimCorp has forged partnerships with numerous third-party vendors, particularly in the realm of alternative investments.

Within this collaborative framework, SimCorp claims to take charge of managing the integration of these third-party solutions, ensuring that clients have access to a diverse range of services catering to their specific needs. This approach is meant to enhance the flexibility of SimCorp's offerings while acknowledging the value of a broader ecosystem in addressing the unique demands of the alternative investments landscape.

In the alternative space, there is a long list of 3rd party software SimCorp has collaborations with. We will mention a few of these in the following sections.

One of these is Alkymi, an intelligent document processing platform that can help save time and money, improve accuracy, and increase visibility. The integration with SimCorp supports extracting data from a variety of document types, including PDFs, emails, images, and slide decks, and automates tasks such as data entry, reconciliation, and document management. Alkymi also provides a fully auditable trail, so users can track the source of all data points. There are currently 3 SimCorp clients using this integration. For more on Alkymi, please see our review here.

Further machine learning partnerships to automate document collection, data extraction, and data delivery into SimCorp for additional analysis and reporting are supported by Canoe and Accelex.

Data integrations into SimCorp can be provided by Preqin, Burgiss, PitchBook, and Cambridge Associates. These partner solutions offer strategy and risk forecasting capabilities and in the near future, they will also include general benchmarking capabilities.

The integration with DealCloud enables deal teams to efficiently manage their deal pipelines, track their progress, and make informed investment decisions. This includes pre-commitments and investment due diligence.

A similar partnership exists with Dasseti to support operational and investment due diligence, to help identify and assess risks, and gather data.

For clients looking for an alternative investments service provider on data, SimCorp has partnered with Colmore who specialize in private market investors. Their main services include 1) outsourced data management, 2) fee validation and 3) fund services.

Lastly SimCorp has partnered with Domos fs support clients who offer their own alternative investment products in the market, also known as general partnerships (GP’s) as SimCorp only supports asset owners or limited partners. It should be noted that SimCorp has a minority stake in Domos fs.

Looking ahead

SimCorp ambitions for the future is to design the system to interact with users in a conversational manner, guiding them through their daily tasks. For instance, users can inquire about their daily responsibilities and receive immediate responses. The system can also assist users in understanding complex data visualizations such as pie charts.

Moreover, SimCorp can provide insights into financial data. For example, it can identify which fund’s Net Asset Values have decreased by 20% and provide reasons for this drop. Based on the latest forecasts, it can also predict when the Target Asset Allocation (TAA) might fall below a certain threshold. The system will also be able to guide users through complex tasks, such as rebalancing their portfolios, using a wizard-based approach.

The aim is to redesign the user-system interaction, making it more intuitive and guiding users through various steps in a wizard-like manner. This is a very exciting development; however, it is still in the early stages, but it has the potential to make investment management more accessible and easier to use for everyone.

We hope you found inspiration in this article and would welcome the community’s thoughts on SimCorp’s alternative investments solution.



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