Meeting the challenge of convergence in asset management

Meeting the challenge of convergence in asset management

Appetite for alternatives continues to grow in the search for alpha. Both traditional and alternative asset managers are responding to a shift in investor demand for outcome based strategies, and as a counter move to growth in low margin passives, writes Jon Trinder, fund services product manager at Linedata. According to the Boston Consultancy Group (BCG), alternatives are expected to account for 16 per cent of global industry assets by 2021.

Historically driven by private investment, institutions such as pensions, insurance and sovereign wealth funds now make up at least 55 per cent of global alternatives (source: PWC's report, Alternative asset management 2020: Fast forward to centre stage) with allocations to property and infrastructure in particular recently boosted by regulatory initiatives.

Additional drivers of this shift to alternatives include the pension funding crisis, with schemes looking for non-correlated returns and long-term, liability driven investments against the backdrop of an ageing population and cyclical stock market. Growth in the numbers of high net worth individuals is also supporting the trend, as they look to protect their capital and generate income during this prolonged period of low interest rates.

In Europe, the regulatory landscape has also fuelled the convergence of traditional and alternative asset management industries over the last five years. The introduction of UCITS V last year has seen EU regulators attempting to harmonise UCITS and AIFMD regimes, principally regarding the depositary liability and remuneration.

It’s not just AIFMD that has led to this regulatory convergence. Much of the G20 legislation post the 2008 crisis focuses on regulating specific activities or protecting consumers regardless of the legal entity or domicile.  Therefore, many regulations now apply to both traditional and alternative funds, leading to less and less of a distinction between them, depending on the type of fund and who it’s being sold to.

So what does the future hold? From a revenue based perspective, traditional asset managers have had to start to broaden their alternative offerings to offset revenues lost from customers switching from active to passive products.

Pressure on margins is likely to lead to increased polarisation of the industry, with medium-sized firms consolidating to achieve improved operating efficiency and distribution through scale and best of breed technology.  At the top end, there will be further blurring of the lines between alternative and traditional managers as both adopt similar sophisticated operating practices and market strategies, and develop more focused distribution channels and better brand recognition.  They will use enterprise software to offer a broad range of product strategies all under one roof, on a global scale. 

At the smaller end, local boutique managers will continue to differentiate themselves through performance, adopting more sophisticated portfolio construction techniques and bespoke customer-centric services and digital solutions.  Only the most flexible technology will be able to keep up with the flow of new instrument types as hedge funds look for new ways to generate alpha. 

Many hedge funds are already starting to invest in cryptocurrencies such as bitcoin. The next year will be critical for this development, as the large banks and consortiums move from proof of concept to rolling out their initial user cases of distributed ledger technology.  Depending on the success, and how the surrounding infrastructure matures, it could be make or break for cryptocurrency valuations. 

Operational risk will continue to be an area of focus, not only as a means of minimising losses but as a direct result of regulatory influence, as seen under the likes of AIFMD, Solvency II and the Senior Managers Regime.  Robotic Process Automation will play a key role in delivering efficiencies and reducing operational risk.  Risk leaders will not only utilise the best available technology to analyse investment risk, but also to maximise their effectiveness at managing operational risk and achieving regulatory compliance. 

Technology has had to adapt and evolve to meet the demands of an increasingly complex industry and customer base.  It will play an even more vital role in meeting the challenges of the future, as the asset management industry continues on its digitisation journey. Maximising technology to manage data and risk will be ever more important in the new world where alternatives are becoming the mainstream.


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