The global alternatives marketplace is undergoing an unprecedented transformation as retail investors pour new capital into alternative investments, and fund managers and their outsourcing partners reengineer operating models for this new paradigm.

For decades, institutional investors were the mainstay of global alternatives—including hedge funds, private equity, infrastructure, private capital, and real estate—creating a large, but relatively finite universe of capital flowing between the funds. Like other markets, the alternatives ecosystem has been impacted recently by global geopolitical conflicts, inflation, rising interest rates, and market volatility.

Despite ongoing uncertainty however, the scope and scale of the alternatives market is expected to expand significantly in the coming years. Industry studies predict that high-net-worth and mass affluent retail investors, exploring ways to diversify their portfolios, will bring an estimated US$500 billion to US$1 trillion in new capital in the next three years, effectively creating a new marketplace.

At the same time, regulators are demanding increased transparency and disclosure to ensure those retail investors have a clear understanding of the investment risks. Technology will play a key role in driving most aspects of the changing industry, as new automated platforms replace outdated legacy systems.

The dizzying pace of change is creating new opportunities and challenges for fund managers who must decide whether to spend resources in-house to reconfigure their existing operating models—training staff, rebuilding processes, and replacing legacy technology—or to bring in an outsourcing partner to help develop and implement that new model. That work runs the gamut from helping with specific process issues to providing a comprehensive review of their operational infrastructure with suggestions for reconfiguring technology, systems, and processes to cut costs and minimise risk.

This approach is a natural extension of the role that outsourcing partners already are playing. Fund managers, who once outsourced back- or middle-office functions such as post-trade settlement or accounting, are increasingly looking for support across the full trade lifecycle to coordinate front-office ‘decision’ functions, including client onboarding, trade execution, and investor reporting.

In one case, fund managers are outsourcing lengthy and time-consuming Know Your Customer (KYC) and anti-money laundering (AML) processes to eliminate challenges with delays in opening client accounts. As the volume of retail investors grows, so will the need for a highly efficient process that aggregates accurate and consistent data sources.

As the alternatives markets’ transformation continues, fund managers will need to have operating models that can provide greater information about performance and management fees and costs, increase education about products for advisors and investors, develop new distribution and marketing channels, ensure product liquidity, and meet new regulatory and compliance requirements around the world.

Finding the balance between what will be outsourced and what will be kept in-house will be determined by evaluating current operating models, existing service level agreements, and the unique future needs of individual funds. Outsourcing partners will then help tailor a new operating model to address those plans.

One element of the new paradigm is abundantly clear: firms relying on outdated, legacy technology will not be able to move fast enough to accommodate the necessary changes for new operating models, which will be powered by new cloud-based data solutions and platforms.

Whether these new platforms are developed to integrate with current systems or are provided by partner firms, the days when teams work effectively with Excel spreadsheets are rapidly ending. Funds must embrace automation—underpinned by artificial intelligence and cutting-edge programs supporting the platforms—to better process volumes of new data, create new products, improve investment strategies, use data across platforms, and develop applications.

In a second example, a large investment manager who was planning to market in multiple European jurisdictions moved to an outsourcing firm’s new platform, which harmonises data and provides automatic, verified reporting for each jurisdiction’s requirements rather than having the client file several separate submissions—a substantial savings of resources. 

Heightened data security is more important than ever before, given the tremendous amount of new information entering the alternative marketplace. It’s vital that funds and their partners work closely to provide a secure, continually monitored environment to reduce operational risk, prevent data leaks, and defend against attacks by cybercriminals.

A tenet of our industry is that all alternative investments are unique, and that each company has its own needs and goals, which means there could be as many different operating models as there are funds. The industry is undergoing dramatic changes, and, at times, it may be difficult to prioritise one area over another. New capital invested by high-net-worth, and mass affluent retail investors will certainly have a significant impact on every aspect of the alternatives marketplace. 

As our industry transforms, fund managers who act now to reassess where they are and where they want to be—often collaborating with trusted partners to reengineer their models to realise that new vision—are most likely to lead the way in the future.