The MFA Ops conference last week highlighted topics around operational risk in alternative investments. The conference was a great opportunity to connect with over 150 operations, legal, finance and compliance professionals from leading institutional investors and GPs, including 8 DV clients. Thanks to a rich discussion, we bring you the DV viewpoint on alternative investments ODD trends.
Operational Risks in Alternative Investments
1. Gen AI roadmap for vendors: All tech vendors and service providers have a GenAI roadmap. It’s a question of when and not if.
2. Greatest non investment / operational risk facing alternative investors today:
- Cyber security and social engineering (proper training and testing can mitigate this)
- Changing regulatory environments create reporting burdens for both investors and asset managers and the changes in rules create strain and stress to research and adapt to the new requirements. Some questioned – Is SEC overstepping its statutory authority?
- Differences in global and regional business challenges when doing business internationally, especially China
3. ADV filing season: GPs focus on finalizing them in March, while LPs begin some annual reviews of them in April. As disclosures become more scrutinized, some GPs and asset managers are leaning towards over disclosing to avoid backlash.
4. The omnipresent artificial intelligence (AI) discussion:
- The adoption and policy around it has evolved greatly over the past 6 months. Adoption will be first done from an operational perspective before investment decision making.
- It’s another area of due diligence when adding a new asset manager / GP or service provider relationship. Check out DV’s GenAI DDQs on the platform.
- From an LP perspective they are trying to understand which of their asset managers and service providers are using it to better understand the risks, but then to also see how they can better use AI themselves as an LP.
- Many quantitative investors and asset managers see this as more of an evolution than a revolution as they have been using machine learning for decades and the recent Gen AI movement is a natural progression – but it’s from analyzing numbers to much more broad applications across workflows and organizations.
- Training employees about the risks and how to identify false positives, and the need for human QA is important. Implementing policies around usage and adoption of AI is important too.
- AI also being used as part of a background check process especially to review social media accounts.
5. Skin in the game, incentive alignment: Operational due diligence is becoming more personal. There’s been a rise in LPs asking GPs about incentive structures, carried interest allocations and ownership percentages.
Additional Operational Due Diligence Resources:
- Checkout takeaways from across the pond – our lunch and learn in Feb 2024
- Quantifying value of operational due diligence (ODD)
- How allocators are leveraging ADV filings
ODD Lunch & Learn in NYC – April 2024
Looking to join our next discussion in New York? Or did you miss taking our cool swag.. water bottles, onesies, tote bags, notebooks, or flashlights, your next opportunity is to join our lunch and learn in April 2024 to score some.
