Data Management

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Stuart Keeler, eFront
Stuart Keeler, eFront
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Data Standardization: No Longer a Luxury

AltExchange Alliance is working to create a universal, open and evolving definition for data formats.

Stuart Keeler, eFront
Stuart Keeler, eFront
It is becoming increasingly clear the Alternative Investment Fund Managers Directive (AIFMD) will place greater emphasis on the capture, manipulation and dissemination of large amounts of complex data. New valuation processes, risk management, and capital requirements are among the key components of the new Directive that will create a very real data challenge.

For many years, firms have spent considerable time and resource manually entering and reconciling information. Despite the inherent risks and inefficiencies, firms could cope with this time-honoured convention. Post-AIFMD it will no longer be an option. Investing in and deploying sophisticated solutions that encapsulate AIFMD’s data requirements into the core architecture and processes will be key. There is also a wider issue, namely the dissemination of the underlying data itself to connected parties.

[To hear about how financial firms are managing their complex data architectures, attend the Future of the Financial Services Data Center panel at Interop 2014 in Las Vegas, March 31-April 4. You can also REGISTER FOR INTEROP HERE.]

Consequently, efforts to define and promote the industry’s first common data standard are more industry-critical than ever before. While IPLA and IPEV kick-started this process, a more recent initiative is the AltExchange Alliance, which is working to create a universal, open and evolving definition for data formats. Such a standard would be able to adapt to shifting market and regulatory requirements, with a view to simplifying and streamlining the sharing of information among fund managers, investors, and other parties.

Founded in May 2013 as a non-profit alliance of 20 firms, the AltExchange Alliance has grown significantly, more than doubling in size to a current membership of 45. It counts among its members some of the biggest private equity players from around the world (a full list of members can be found here). AltExchange has already made substantial progress in formulating a common data standard. In December 2013, it published its Group One standard – the industry’s first ever detailed template for the exchange of data related to capital accounts, schedules of investments and cash flow activity which has undergone a detailed review by GPs and beta testing is nearing completion. The aim is for the standard to go live in April – less than a year on from the formation of the alliance. The process has so far benefited from a high level of interest, input, and participation from GPs and investors, underlining industry demand for the initiative.

The AltExchange data standard enables fund managers to create a single information pack for investors. It offers tools for GPs, fund of funds, fund administrators and other managers to efficiently produce this data in the right format. Tailored XML domains are used to standardize the content and format of data for capital accounts, portfolio companies and investor cashflows with additional domains in the works. By using XML, the standardized data can be ‘plugged into’ and processed by applications already in use such as Excel and other PE products. This allows firms to integrate the standard with their existing systems.

Unique to the AltExchange data standard is the existence of a corresponding validation platform, built and supported by eFront under contract to the AltExchange Alliance. Firms using the AltExchange standard submit a data file to the validation engine for certification prior to distributing it. This ensures that when a file is received, it can be immediately used by the recipient.

The platform checks format and completeness. If successful, a file is certified and the platform will send a validation certificate back to the fund manager. Finally, the GP or fund manager can distribute the validated data file to the appropriate recipients. In order to satisfy security concerns, no data is stored on the validation platform.

With just a few months to go until the implementation (for most firms) of AIFMD, a new era of data management is bearing down on the alternative investment industry. As the first comprehensive data standard, AltExchange promises to transform the way GPs and LPs, fund of funds and fund administrators gather, share, aggregate, and analyze data. The timing of this industry-wide initiative could not be more appropriate. It's the Alliance's belief that late adoption will be a risky endeavor – firms need to take a proactive stance towards meeting the new requirements, and the new standard is an important piece of the puzzle.

Stuart Keeler is managing director of data services at eFront. As of 2012, Stuart manages the eFront Pevara business unit as well as the company's global initiatives related to data sharing and communication across the alternative investment industry within the AltExchange Alliance. In 2002, he joined eFront as Managing Director of the UK subsidiary.

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IvySchmerken
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IvySchmerken,
User Rank: Author
3/31/2014 | 4:46:50 PM
re: Data Standardization: No Longer a Luxury
We've seen some standards gain mass adoption such as the FIX protocol in electronic trading, initially for equities with different tags that has expanded into fixed income and also heading into post-trade. This is a very industry specific protocol, not as broad as XML, so maybe the semantics are more well defined. I suppose firms did not see it as a competitive advantage to write their own message standard for sending orders to brokers or exchanges.
Becca L
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Becca L,
User Rank: Author
3/31/2014 | 3:40:05 PM
re: Data Standardization: No Longer a Luxury
Excellent points, Richord. As you say, it seems the industry's reached reached a point where efficiency as a competitive advantage is no longer a selling point.

It seems AltExcahnge is giving this quite a bit of thought, still it's likely the standard won't be the perfect solution out of the gate, but using lessons from the long term standards you mention, it's possible innovators will be better prepared to define and interpret. Here's hoping!
Richord
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Richord,
User Rank: Apprentice
3/30/2014 | 2:23:58 PM
re: Data Standardization: No Longer a Luxury
Data standards reduce the inefficiencies in operations but also reduce the barriers to entry and competitive advantage. If each participant in the market reaches similar levels of efficiency and capability, competitive advantage is lost. ERP systems are necessary but no longer a competitive advantage.
As a result there is an inertia to adopting standards. There is also another factor that must be considered and that is the degree of standardization. We have seen with EDI and EDGAR, two examples of long term standards, that some of the benefits expected were not achieved because of two factors: the lack of semantics defining the standards and the evolution of the standards. Additions were made over time which added content and complexity but had a tendency to reduce common understandings of each of the terms in the standards.
XML lacks strong semantics and as a result data elements can have ambiguous, conflicting and duplicative meanings and interpretations. The degree to which committees who create these standards identify and clarify these ambiguities is a key factor that determines the long term benefits derived.
IvySchmerken
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IvySchmerken,
User Rank: Author
3/29/2014 | 3:37:51 PM
re: Data Standardization: No Longer a Luxury
A new era in data management is brewing indeed as a result of the AIFMD and other regulations. I understand the AltExchange will enable the alternatives industry - general partners, fund of funds, etc. to conform to a standard and reduce manual inputs and errors as well as distribute complex data. It seems like AltExchange effort intersect or parallel other global initiatives such as the work of the Financial Stability Board (FSB) and efforts to create Legal Entity Identifers (LEIs) and global LEIs or (GLEISs). I realize this relate to the big banks and counterparty risk. Does AltExchange intersect with any of the other data management initiatives?
Stephen Winks
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Stephen Winks,
User Rank: Apprentice
3/29/2014 | 1:44:42 PM
re: Data Standardization: No Longer a Luxury
Your work in advancing modernity is brilliant.. Institutionalized inefficiencies have perverse incentives that thwart innovation with the unintended consequence of assuring obsolescence of the very forcers pushing back. Though the wisdom of your good work is not fully appreciated, it is vital and essential.
SCW
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