An increasing trend in the last few years is the growth of alternative investments—mostly to get steady yield and/or additional return. But with this growth comes significant risk analysis challenges.
The Challenge Beyond Modeling
Besides the modeling challenges inherent in alternative investments, analyzing risk for these assets includes several operational hurdles:
1. Data Management
The ability to manage alternative investment data along with other traditional asset classes is crucial for getting a consolidated view across portfolios for risk, performance, and accounting. Most firms struggle with fragmented data across multiple systems.
2. Lack of Pricing Data
Unlike publicly traded securities, many alternative investments don't have readily available market prices. Firms may need to use 'proxy' pricing methodologies, which introduces additional complexity and potential model risk.
3. Separate Legacy Systems
Many firms have separate systems—often legacy platforms—to manage alternative investments. These systems typically don't integrate well with the platforms used for traditional assets, creating silos and manual reconciliation requirements.
The Modern Solution
A more modern solution will need the capability to hold all asset classes together as one solution. This enables firms to:
- Access portfolio data along with risk, performance, and accounting all together in real-time
- Eliminate manual data aggregation and reconciliation
- Provide managers with a unified view for efficiently managing multi-asset portfolios
The Path Forward
As alternative investments continue to grow as a percentage of institutional portfolios, the need for integrated risk analytics becomes more pressing. Firms that solve the data and system integration challenges now will be better positioned to serve investors who expect the same level of transparency for alternatives as they get for traditional assets.
The key is selecting solutions that can handle the complexity of alternatives while integrating seamlessly with existing infrastructure for traditional assets.