The growth of alternative assets (real estate, private equity, hedge, and venture capital) has exploded in the last decade. What was a $3 trillion market in 2012 is today north of $10 trillion with forecasts predicting $14 trillion by 2023 (Preqin). As alternative asset classes continue to grow, web 3.0 technology such as decentralized semantic data frameworks has the potential to improve processes and lower management costs.
Industry stakeholders are starting to invest in blockchain in order to create new automated solutions that use decentralized ledgers to save both time and money (Institutional Investor). The technology is easing a growing number of internal and external pressures that are transforming the day-to-day role of fund administrators.
Problems and Inefficiencies Facing Fund Administrators
In this rapidly growing market, the role of a fund administrator can vary greatly depending on the firm. The need for reliable data now permeates across all functions of the job. For starters, the amount of reporting has increased with the growing amount of regulation. Meanwhile, the data exchanged between trustees and fund administrators require increasingly more transparency, uniformity, and integrity.
The common denominator between each function of the job is that more and more real-time, trustworthy data is required to ensure information symmetry between all of a fund’s stakeholders.
It can also impact other parts of the job, including but not limited to:
- Inquiring about details of fund auditors
- Fund accounting system
- Business continuity
- Disaster recovery planning
- Regulatory compliance
Fund administrators are also finding that members are demanding more control and transparency. However, information asymmetry is rampant. Data is often under-reported, outdated, and therefore insufficient in helping to make informed decisions.
For example, obtaining an accurate view of an alternative investment portfolio is likened to a scavenger hunt which involves compiling (typically outdated) information across emails and obscure file folders and formats. As a result, there is a limited understanding of a portfolio’s valuation or the amount of liquidity at any given time.
The data incongruency issue is echoed by Northern Trust’s Head of Front Office Solutions, Melanie Pickett, who spoke to Institutional Investor about the great disparity in the information symmetry between GPs and LPs. She continued on to say that GPs often fail to satisfy LPs reporting needs. Not only do LPs receive less information than they’d like, they are the ones footing the bill for all the expenses. As information symmetry improves, integrity and security must improve as well.
Accumulate solves this issue with an entirely new data paradigm anchored in identity. The protocol allows individuals and financial institutions to create a secure audit trail for private markets with a system that validates data ownership, offers custodianship over keys, and builds multi-party consensus networks. Furthermore, Accumulate offers more robust data integrations through the uniformity afforded by web 3.0 using semantic data frameworks.
How Blockchain Can Improve Fund Administrator Data Issues
With up to 10% of the world’s GDP anticipated to be stored on blockchains by 2025 (World Economic Forum), it’s no surprise that digital ledger technology is being looked at as the future of financial data management. As legacy systems are digitized, workflows will become more transparent to allow for increased operational efficiency. Digital ledger technology can improve data standardization to help minimize reconciliation.
Accurate real-time data is one of the most significant advantages of blockchain. For example, BNY Mellon recently commented on how the fund distribution capabilities of real-time digital ledger technology would have greatly benefited investors during March 2020.
That March, capital was flowing into treasury and government money market funds, but also being pulled out of prime money markets at the same time. The volatility at play in that market could have been reacted to more quickly if there was more transparency into fund creation and redemption.
Aside from providing more accurate fund distribution data, a distributed ledger can help across several fronts from anti-money laundering (AML) and know your customer (KYC) to eliminating redundant functions and lowering operating expenses (Ernst and Young).
Additional benefits for administrators provided by blockchain include:
- Increased liquidity
- Transferability of mutual fund units
- Improving collateral options
Digital ledger technology can improve data integrity so that more accurate information is shared, which means all parties can help make more informed, faster decisions. This will improve issues like information asymmetry between GPs and LPs, fragmented data that is siloed across several locations, and data reliability.
Accumulate can help fund administrators maintain secure and verifiable records. More specifically, through the use of a decentralized semantic data framework, Accumulate offers greater ownership, uniformity, and security of data than what is afforded by contemporary models. Instead of focusing on how to build an existing blockchain like many other protocols, Accumulate focuses on how to manage interactions with institutions and validate ownership using the latest web 3.0 data frameworks.
As the role of the fund administrator changes to integrate more reliable data, many firms are looking toward digital ledger technology to improve operational inefficiencies. Issues such as information asymmetry between LPs and GPs, as well as the “scavenger hunt” that is the modern day alternative asset portfolio evaluation, can be improved through using blockchain. Even less obvious functions of the fund office can benefit from blockchain such as AML, KYC, and fraud elimination.
Overall, with the World Economic Forum anticipating that 10% of the world’s GDP will be stored on blockchain in the next 5 years, the technology is hard to ignore for fund administrators. Accumulate is the platform for solving the modern data demands for fund administrators.