Use technology to rebalance value to investors. Internally,
money managers are investing in artificial intelligence and big data
capabilities and more seamless integration of front and back office
processes. Externally, leaders are building mobile and tablet apps, and
expanding their use of
social
media. In the future, innovative models, especially in the retail
space, will integrate investing with elements of social media,
interactive gaming and education. For institutional investors,
technology will enable more proactive risk management and governance.
Create and sustain trust through transparency. As opacity
recedes, money holders will see who has been working with their best
interest at heart. We foresee the doom of the
black
box hedge fund model.
According
to Amanda Tepper, CEO of
Chestnut
Advisory Group, “investors are increasingly demanding clear, concise
and consistent communication from their asset managers. In a recent
Chestnut investor survey, 92% of respondents said they view investor
communication as integral to an asset manager’s mission.” In addition
to investor demands, money managers must comply with an increasing array
of regulatory requirements. That said, regulators have a history of
protecting us from the problems of the last crisis, not the next one. As
self-protection, we see increasing use of
self-regulation.
For example, some private investment firms will establish active
executive boards similar to public companies, to give money holders and
intermediaries comfort that decisions are being made thoughtfully and to
create checks and balances on the historically all-powerful or cult CIO.
We expect the current largely manual and sporadic due diligence process
to be revamped to include more systematic, ongoing oversight and
governance.
Manage integrated risk, not risk in separate silos.
The
traditional view segregates risk into market, credit, and operational
and buckets. For example, in the classic org chart, the Investment
Officer is responsible for market risk; the Treasury Officer or CFO for
counterparty risk; and the COO for operational risk. However, risk is
not additive or linear, and often hot spots in one area may cause
undetected issues. The money manager of the future will learn to look at
risk holistically and pay attention not just to lagging indicators
(losses) but to leading indicators (talent retention, investment in
infrastructure, succession planning).
Generate new sources of alpha. The preference for alpha
generation based on security selection, i.e., “stock picking”, has
transitioned to alpha generation based on fund manager selection, which
has transitioned to alpha generation based on asset allocation - both
strategic as well as tactical. The best opportunities for alpha
generation at the security and fund level, e.g., special situation or
frontier markets, are shrinking over time. We envision that the ability
to allocate in an agile way across multiple asset classes will be a
differentiator - across both public as well as private / illiquid
assets, such as private equity or real estate. We also envision more
aggressive use of activist investing, broadly defined. In the world of
private equity and venture capital, the equivalent of an activist
strategy are those investors with a
portfolio
including experienced operating executives and a set of preferred
operational service providers.