Over the last 45 days, I have been travelling, spending time in Japan, France, England, and India. During my international excursions, I was fascinated to witness the distortion between perception (market news) and reality.
Japan appeared to be booming! There was a swell of consumer vibrancy I would not have anticipated from simply reading the news.
France has now elected its youngest President, Emanuel Macron, who brings hope both to France for a better future and to the EU for continued unity despite Brexit. The political dialogue in the media made it appear a much closer race.
In the UK, especially London, I do not hear much about Brexit. If I didn’t know better, I would think it was an imported phrase.
India seems to be thriving, despite the de-monetization that was supposed to ground its economic growth to zero and the trade wars about which President Trump seems to hint: to limit technology workers enabling US business growth.
Back at home in the US, there has been a dramatic rise in mergers and acquisitions among large corporations in addition to a surge in new startup ventures.
All in all, I feel a sense of real dynamism globally. People are optimistic about the economy. Consumption is high and more wealth is being created every day. The number of millionaires in the US was at a record high of 10.8 million at the end of 2016.1
So what does this mean for the asset management industry?
There has been talk about the demise of active management with passive investment strategies and exchange-traded funds (ETFs) absorbing much of the new assets being allocated and/or generated. My view is that this belief is misplaced. Active management, though challenged in the near term, will remain attractive on the back of continued growth in the overall institutional asset pool with the presence of complicated and illiquid markets that are not ideal for passive strategies. In fact, active managers are well placed today to leverage growing possibilities around big data and artificial intelligence by employing new and comprehensive data sets that are highly reliant on computational capabilities. A recent Managed Funds Association (MFA) conference in Washington D.C cited that active management is growing. Overall assets under management hit 3.2 Trillion for Hedge funds at the end of 2016. Recent capital inflows in the hedge fund industry also indicate the same. Data suggests that in Q1’17, capital inflows in hedge funds was nearly $20B, with macro and event-driven strategies attracting the largest amounts of new capital2. In US alone, about 67% of institutional assets remain allocated to active investment strategies3. Continuing growth in overall institutional asset pools auger well for active management going forward.
Although 2016 was among the worst years for hedge fund performance, assets under management rose to an all-time high of $3.22 trillion4. I believe that the downfall of active management is overhyped - in reality, it is evolving, taking on new forms (and fee structures) to leverage more agile and innovative business models and platforms. The search for rationalization and efficiencies has spawned a whole new breed of providers from discrete data vendors to full platform solutions.
At Linedata, we are beginning to see two forces at work in the global asset management business model:
- The first one is efficient cost cutting and scalability; leading to democratization of services, outsourcing and new platform entrants. Our recent acquisition of Gravitas is a step in that direction to meet our clients growing needs globally around outsourcing.
- The second force is less noticed - it is about growth and innovation. The combination of the latest technologies, including AI and machine learning, with the rising need to manage the wealth of more people globally (rise of wealth management platforms) is creating new opportunities for active managers – who I would also call agile managers, as they evolve their business models to service these new and upcoming needs. One of the biggest needs asset managers have is how to SCALE DOWN – i.e. create business operations that have a lower per client cost, but handle many clients.
Our business model helps managers with both forces, as a full front to back provider of integrated software and services. Linedata’s global asset management technology solutions help companies scale, automate, and create efficiencies, while our services help companies remain agile, adapt and focus on creating a sustainable long term business model.
1 “Clifford, Catherine. A Record Number Of Americans Are Now Millionaires, New Study Shows. CNBC. March 24 2017.http://www.cnbc.com/2017/03/24/a-record-number-of-americans-are-now-millionaires-new-study-shows.html
2 “Preqin: Hedge Fund Industry Inflows Hit $20B In Q1/17” finalternatives, May 17 2017 http://www.finalternatives.com/node/35174
3 York, Linda “Institutions Sticking With an Active Approach”, May 1, 2017.
4 Preqin “Hedge funds in Numbers”. “Hedge Fund Spotlight” Volume 9, Issue 1 January, 2017 https://www.preqin.com/docs/newsletters/hf/Preqin-Hedge-Fund-Spotlight-January-2017.pdf
ABOUT THE AUTHOR
Linedata Gravitas a leading provider of middle office and technology services to the asset management industry, combining dedicated professionals, industry standard processes and world-class technology to create smart scale and reduce operational risk and overall costs.
Linedata was most recently named “Best Technology Provider” in the HFM European Service Awards 2017, Linedata Gravitas was named “Best Alternative Investment Outsourcing Platform” in the 2016 Wealth & Finance International Awards and “Most Innovative Hedge Fund Solutions Provider, US” in the 2016 Acquisition International Awards. The company has also been recognized as “Best Middle Office Solution” in the 2015 HFM US Hedge Fund Services Awards and “Best Outsourced Solution” in the 2015 HFM US Technology Awards.