It’s been awhile since we have talked about innovation in the FinTech industry and how it affects the asset management industry, especially the alternative investment industry. While there has been a significant amount of progress in business to consumer models (take peer-to-peer lending, crowd sourcing or online banking as examples), very little innovation exists in the corporate world outside of what blockchain and digital assets are already promising to revolutionize. (Blockchain technology basically allows two counter parties to keep one set of records for all transaction and accounting activities).
So why is there resistance to innovation? When it comes to innovation, on an enterprise-level, companies tend to proceed slowly and cautiously. An abundance of appointed decision makers and a predisposition to mitigate operational risk contribute to delays in innovation. In examining innovation from an industry-level, there are currently several highly inventive developments that are expected to help firms better navigate today’s volatile landscape. (Volatile markets are generally more challenging to perform in, and have resulted in considerable fee reductions over the last 10 years.)
When I first wrote about innovation a few years ago, my thoughts focused on cloud computing, social media and mobile technology. While all of these have experienced significant growth, they have had little impact on the institutional world of asset management. Today, the buzz is all about cybersecurity, big data and (still) cloud computing. While these are important topics and relevant to hedge fund entrepreneurs, is there something more profound that is affecting our industry?
In speaking recently to an executive of a large hedge fund platform that has both high growth and high performance, I received some validation to a view that is beginning to take form in our industry. “We do not view ourselves as an asset management firm. We are more of a technology platform that uses technology and data to deliver results in many structures that match the risk profile of our clients. We will partner with clients to leverage our technology and (big) data to come up with mutually successful outcomes. It’s as important to be a platform as it is to have fundamental investment skills and, finally, it’s all about data.”
While our industry is becoming crowded, private equity firms and hedge funds combined still make up less than 10% of global investable assets of approximately $100 trillion. Given the current volatile state of the market, performance is hindered; therefore, expectations on returns in a close to zero interest economy are significantly marked down. There is fee pressure from the pensions and endowments that are increasingly hard to justify as it does not commensurate with the current industry returns. However, pensions and endowments have even fewer alternatives (no pun intended) to going to the alternative industry, so we do see growth in this space.
So where is the innovation? In my view, it has finally dawned on us that machines, while they cannot replace humans, are actually better at doing certain things. If leveraged correctly in combination with human oversight and partnership, machines will produce better results than humans alone. Machine learning, artificial intelligence, big data, business intelligence and robotics (excluding the mechanical aspects) are going to fundamentally change the investment process -- much like virtual reality and augmented reality are altering the way we interface with our devices.
While virtual reality and augmented reality will have more commercial impact in the consumer business and to individuals, business intelligence and data analytics will make a bigger impact on the asset management industry. As an Equity Long Short Investor, you have access to the hiring metrics of every firm in the healthcare sector or you are made aware of new patents (filed and or granted) as they occur in the pharmaceutical industry. As a CLO manager, you have data on the entire universe of loans globally relevant to your markets. As a Global Macro Manager, your computer tell you with 80% accuracy the chance of currency appreciating or depreciating based upon signals or inputs to the model. While very smart analysts do some of this work, the sheer scale and volume is massive; therefore, a human in partnership with smart computing or artificial intelligence shifting through very large sets of data would be truly awesome. I’m talking zottabytes.
1,024 Terabytes = 1 Petabyte
1,024 Petabytes = 1 Exabyte (In 2000, 3 Exabytes of information was created.)
1,024 Exabytes = 1 Zettabyte
1,024 Zettabyte = 1 Zottabyte
How does the future look? Over time, there will be a need for more and more data analysts and data scientists. (For example, Microsoft had orders to scale more data analysts and scientists than other larger tech firms.) These data analysts and scientists will develop themes based upon analytics of large data sets that most funds do not have access to today.
Most of the functions that Gravitas has built – for example, private and proprietary technology -- will become cloud-based platforms that adhere to our Software-As-A-Service model. As a result, managers will become more focused on taking large amounts of data and analyzing patterns and artificial intelligence to come up with investment themes. Firms will have the benefit of having options to outsource routine front to back office processing work to platforms and their administrators.
Typically, to avoid complete dependence of work, Gravitas sees two or three key partners that add value over certain functions, but leverage a common robust data platform. This means that firms will be able to mitigate risk and leverage end-to-end services to solve many of the functions that they currently do in-house with multiple vendors. Just how universities use platforms for learning, funds leverage platforms to develop scale, mitigate risk and gain competitive advantage.
So in four simple words: It’s all about data!