The Impact of MSCI Index Exclusion on Fund Flows and Alternative Data Partnerships

The MSCI index ecosystem has long served as a linchpin for global capital allocation, with its inclusion or exclusion of securities directly influencing fund flows and market dynamics. However, as regulatory scrutiny intensifies and ESG standards evolve, the strategic implications for asset managers and private market participants are becoming increasingly complex. This analysis explores the empirical trends in fund flows following MSCI index exclusions, the growing reliance on alternative data partnerships to mitigate risks, and the broader strategic adaptations reshaping the industry.

The Quantifiable Impact of MSCI Index Exclusions

MSCI's quarterly index reviews, such as the November 2025 adjustments, underscore the scale of its influence: 64 companies were removed from the MSCI ACWI Index, while 69 were added. These changes trigger immediate portfolio rebalancing by index-tracking funds, often resulting in significant outflows for excluded firms. For instance, JPMorgan has warned that the potential exclusion of MicroStrategy (MSTR) from MSCI indices could lead to outflows of $2.8 billion, with a worst-case scenario of $8.8 billion if other index providers follow suit. Such volatility highlights the systemic risk posed by index-driven liquidity shifts, particularly for companies with concentrated index exposure.

The case of MSTR also illustrates the broader debate over index provider classifications. MSCI's consultation on whether firms holding 50%+ of assets in digital currencies should remain in its global indexes signals a tightening of criteria, which could redefine sectoral allocations and force asset managers to reassess their holdings. This regulatory and methodological evolution is not limited to MSCI: the UK's Financial Conduct Authority and the European Securities and Markets Authority have imposed stricter rules on ESG labeling, prompting MSCI to rename five indices to avoid greenwashing accusations.

Strategic Adaptations: Alternative Data and Private Market Leverage

Faced with these challenges, asset managers are increasingly turning to alternative data partnerships to mitigate exclusion risks. For example, Guotai Junan's recent MSCI ESG rating upgrade to AAA was partly attributed to its integration of non-traditional metrics, such as geospatial data and supply chain analytics. This approach allows firms to preemptively align with evolving ESG benchmarks and avoid exclusion. Similarly, in the US commercial real estate sector, asset managers have leveraged MSCI's 2024 data on office market dynamics-such as a 17% year-over-year increase in sales volume-to pivot toward distressed debt strategies and private equity co-investments.

Private market participants are also innovating. The MSCI-Burgiss dataset, which provides survivorship-bias-free insights into private capital performance, has become a critical tool for limited partners seeking to diversify away from public market risks. Academic research leveraging this dataset has demonstrated how alternative data can enhance liquidity risk management, particularly in private equity, where traditional benchmarks are opaque.

Case Studies in Strategic Resilience

EFG Asset Management Americas' 19.0% reduction in its MSCI stake in Q2 2025 exemplifies the tactical recalibration underway. By decreasing exposure to MSCI itself, the firm appears to hedge against potential outflows from index-linked portfolios. Conversely, Cumberland Partners Ltd's 21.7% increase in MSCI holdings during the same period reflects confidence in the company's long-term resilience, particularly given its $3.0 billion share repurchase program and dividend strategy. These divergent approaches highlight the spectrum of strategies asset managers employ to navigate MSCI's evolving landscape.

Meanwhile, Westfield Capital Management Co. LP's 17.8% reduction in MSCI shares underscores the sector's sensitivity to market volatility. Yet, with institutional ownership of MSCI at 89.97%, the firm remains a cornerstone of institutional portfolios, suggesting that exclusion risks are being managed through diversification rather than outright divestment.

The Road Ahead: Balancing Compliance and Innovation

The strategic implications for asset managers are clear: reliance on traditional index-linked strategies is no longer sufficient. As MSCI and regulators tighten definitions of ESG and sustainability, firms must invest in alternative data infrastructure to stay ahead. This includes partnerships with geospatial analytics firms, social media sentiment platforms, and private market data aggregators. For private market participants, the integration of MSCI's alternative datasets offers a dual benefit-mitigating exclusion risks while gaining deeper insights into non-traditional asset classes.

However, challenges remain. The lack of standardized frameworks for alternative data interpretation creates operational complexity, and the cost of data acquisition can be prohibitive for smaller firms. Moreover, the recent 20% global decline in greenwashing cases suggests that regulatory scrutiny is intensifying, requiring asset managers to align their strategies with both MSCI's evolving criteria and broader ESG mandates.

Conclusion

The MSCI index exclusion mechanism is no longer a passive market signal but an active catalyst for strategic innovation. As fund flows become increasingly sensitive to index adjustments, asset managers and private market participants must adopt a dual approach: leveraging alternative data to preempt exclusion risks while diversifying into private market strategies to buffer against public market volatility. The coming years will test whether these adaptations can sustain long-term value creation in an era of heightened regulatory and ESG scrutiny.