The murky world of alternative investments could become much clearer as a result of a new platform being developed by the Depository Trust and Clearing Corp. with the help of the biggest names in the clearing and custody industry.
The purpose of the platform 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 platform, Alternative Investment Product, is already being used by Pershing LLC. The
Charles Schwab Corp. is testing it, and National Financial Services LLC,
Fidelity Investments' clearing unit, will have it up and running in 2011.
Meanwhile, about 15 DTCC- affiliated sponsors of alternative-investment products are testing the platform, said Ann Bergin, managing director of DTCC Wealth Management Services.
In an age of automation, those involved in alternative investments still rely on one-to-one communication methods such as phone calls, faxes and e-mails to exchange information.
With the new platform, the DTCC serves as a middleman be-tween the firms that create alternative investments and those who sell them.
On one side of the DTCC are
hedge fund and non-traded
REIT manufacturers and administrators who feed data to the DTCC about their investments. On the other side are registered representatives and finanical advisers who want to sell the investments to their high-net-worth clients.
Wall Street hasn't had such a direct way of connecting alternative-investment-product manufacturers and distributors such as broker- dealers, observers said.
A common complaint about alternative investments has been that it is difficult to get market data that accurately reflect their value. Some non-traded REITs, for example, maintain one per-share price on a client's statement, regardless of changes in the value of the fund's underlying real estate holdings.
“The challenge for many alternative investments is that they're non-standardized,” said one industry executive, who asked not to be identified. “They're not always priced and valued on a regular basis. This is an investor need, a broker-dealer need.”
The hope is for an easing of the tug of war over information regarding alternative investments, said Cathy Clauson, a Schwab Advisor Services vice president.
“Issuers will be able to disseminate or push information to multiple custodians in a standardized and automated manner,” she said. “Broker-dealers and custodians will no longer have to pull info and data from issuers and their service providers, and will be able to devote more of their resources and efforts on acting on that information.”
The mutual fund industry struggled with the problem until the 1980s, when the DTCC created its FundServ platform — now the industry standard utility for mutual fund processing.
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.”
The alternative-investment industry now has the same opportunity that the mutual funds industry had when the DTCC created FundServ — to harvest the growth potential offered by an operationally efficient platform, Ms. Bergin said.
In the last year, scandals have shaken the high-risk — but lucrative — alternative-investment arena.
In October, the Justice Department charged Raj Rajarantam, the founder of the
hedge fund Galleon Group, with conspiracy in a $20 million insider-trading ring.
Last summer, the Securities and Exchange Commission charged Medical Capital Holdings Inc., which raised $2.2 billion from 20,000 investors, with fraud in creating private placements.
Regulators are clearly on the watch.
Last month, Richard Ketchum, chairman and chief executive of the
Financial Industry Regulatory Authority Inc., said that Finra exams are paying close attention to sales of non-traded real estate investment trusts, or private REITs.
Last year, the market for non-traded REITs soured. Investing largely in commercial real estate, many of the largest non-traded REITs had a tough year, slashing dividends to investors and shutting redemption programs.
Observers said a number of elements have to fall in place for the platform to succeed.
“The critical element is getting the product sponsors to join,” said the industry executive. “They have to build the interface to DTCC.” If it works, he said, “this has the potential to mainstream alternative investments as a core asset allocation of an investor's portfolio.”
The participation of Schwab, Fidelity and Pershing in the new DTCC platform will help. If the investment firms do not meet the criteria of these firms, they lose access to tens of thousands of reps and advisers.
“If you get [Schwab and Fidelity], the rest of the industry will follow,” said Nicholas Schorsch, chief executive of American Reality Capital, whose management unit has $8 billion in non-traded REITs. “No one else has a choice.”
Ms. Bergin stressed that the new program is an operational service and not a platform that puts a price on products, even though changes in a product's price can be broadly communicated to clients through the DTCC from the product maker.
“Will it become the industry standard?” she asked. “That is our intention.”
E-mail Bruce Kelly at [email protected].
