Weatherproofing has to start long before a crisis. If, for instance, an integrated cash flow forecasting solution had existed back during the GFC, its timely insight, backed by robust data, would perhaps have enabled a strong counterargument from the illiquid asset teams, eliminating the hasty decisions that a public market risk perspective often triggers.
The dynamics of fund cash flows play a critical and challenging role in meeting diversification targets. Sophisticated asset managers confirm that careful liquidity planning is essential to achieve this, but often this insight is either stuck in the back office, never to make its way to the trading desk. Or based on yearly forecasts that become quickly outdated and offer little accuracy to guide portfolio allocation decisions in the here and now.
Much of the challenge around cash-flow forecasting models is that they need to be able to work with infrequent, unstructured and poor-quality data that is the signature pattern of illiquid alternative assets. The algorithms need to use both proprietary private market data, supplemented by data obtained from market vendors, and triangulate to fill the remaining gaps. In situations where investors try to build an in-house system for cash-flow forecasting, the development quickly turns into a quagmire, overcomplicated by attempts to capture all details, where accessing and maintaining such data becomes a nightmare, and no model is considered good enough.
Instead of striving for illusive precision, when it comes to long-term forecasts, the key to gaining control is making cash-flow forecasting a continuous, e.g., monthly, discipline within the investment process. This can be achieved by an integrated front-to-back, cash-flow forecasting solution that can readily make real time data available across the organization.
By integrating with a firms' investment book of record, such a solution could deliver critical visibility on liquidity and exposure across all asset classes. This vital tool can enable LPs fast access to consolidated data, to accurately and credibly assess liquidity exposure and reliably inform allocation decisions.
Innovation like this would not only enable LPs to compare apples (public markets) and oranges (private markets) more accurately, but empower illiquid asset teams with statistical data, to quickly demonstrate what they already know to be true but lose sight of in the haze of a global market event: that private assets do not correlate, in the long term, with their public market counterparts. This is the fundamental premise upon which multiasset portfolios are formed, to weatherproof, come rain or shine.
Thomas Meyer is Luxembourg-based product manager, director of alternative investments at SimCorp. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.