A wise man once said: If you want clarity, stand on your tippy-toes and try to see if you can catch a glimpse over everyone else’s heads. And if that fails, go get yourself something to step on.
Obvious advice to be sure – thanks Dad – but also easier said than done, unless one has a platform on which to elevate themselves. In the case of alternative investments, managers want and potentially require a different kind of industry-wide standards platform.
That is exactly what the Depository Trust and Clearing Corp. with the help of some of the better-known names in the clearing and custody industry, is planning to do: create a platform that all alternative investment vehicles can list on, abide by and rise to.
According to the DTCC, the purpose of the new platform, called the Alternative Investment Product (click here for a PDF summary of the initiative), is to create standards, centralize data and automate transactions involving private alternative investments such as limited partnerships, hedge funds and non-traded real estate investment trusts. The AIP platform is already being used by Pershing LLC and is being tested by The Charles Schwab Corporation (SCHW), as well as National Financial Services LLC, Fidelity Investments’ clearing unit. An additional 15 DTCC-affiliated sponsors of alternative-investment products are also giving it a trial run.
The new platform is meant to have the DTCC serve as middleman between the firms that create alternative investments and those who sell them – hedge funds, private equity shops and even REIT makers on the one side, and registered representatives and financial advisers on the other (see illustration below from the DTCC on how the business flow would work).
The end result is literally a FundServ for alternative investments, the platform also created by the DTCC in the 1980s to resolve similar issues within the mutual fund industry. On its website, the DTCC said the new alternative-investment program is modeled after its mutual fund services program and “has the potential to similarly transform the business of alternative and direct investments.”
Ironically, FundServ itself has been a panacea of sorts for many hedge funds over the years, primarily as a way to “get distribution” to retail, high-net-worth clients through financial advisers who in many cases won’t even consider looking at an alternative investment if it’s not on the platform. A quick glance at FundServ’s home page shows at least two alternatives firms receiving the thumbs-up for getting on the lineup.
The concept of a separate platform specific to alternatives could be both a good and bad thing. It is good from an institutional standpoint in that uniform standards and reporting would be the norm, but bad from a retail “distribution” standpoint in that advisers could easily choose to skip the “AIP” outright, deeming it too complex and murky for their clientele.
If there is one thing that concept of an alternatives FundServ has going for it, it is the increasing popularity of transparency in the alternatives world. Hedge fund industry trade group Managed Funds Association (MFA) announced earlier this year that it plans to collect key financial data from managers as part of the industry’s efforts to be more open. The data, to be reported by managers through PerTrac Financial Solutions’ P-Card system and collected for the MFA by an independent accounting firm, will be used to help educate policymakers and journalists about the industry.
It is that level of transparency, and potentially then some, given its for purchasers, that an “AIPServ” would ultimately try to provide advisers and in turn investors.
So will an AIPServ, or whatever it eventually gets dubbed, fly? Our suspicion is that if enough key players buy in and utilize it, then yes. Still, there will always be certain alternative strategies that simply don’t fit into the confines of a standard or platform, no matter how high the managers stretch.