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.