The asset management industry has undergone fundamental change in recent years amid increased regulations, geopolitical uncertainty and market volatility, to list just a few of the challenges faced.
On the subject of data, this year we also expect to see more concrete application of big data in investment management. The use of sophisticated data analysis tools on large data sets, looking for patterns in data to provide new insight, offers tantalizing opportunities for differentiation and improved alpha. Some quant-driven hedge funds took the lead on this before the term “big data” was coined – with sustained high returns using sophisticated in-house built tools. Some of the emerging big data solutions of interest to asset managers in particular are in behavioral finance and the use of social media as complementary risk factors.
It shouldn’t be a surprise in light of all the above, and in light of events such as the near Grexit, Chinese markets meltdown and the recent Brexit vote, that good risk management practices will stay at the top of the buy-side’s to-do list. Regulators are increasingly asking for full transparency of data and models used in risk and regulatory reporting calculations by financial institutions. Investment managers need to know the details of their risk measures so it is essential that models and processes are well documented and validated. They will also need to demonstrate and document why individual instrument types were covered in each model.
Much of the above would be naturally thought of in a traditional office context. However, mobility is another trend that has been evident for some time, albeit that it perhaps has still to really take off for the complex and highly regulated workflows in the investment management industry. Most investment management professionals today access their systems from just one location, their desk, and have to rely on offline reports and management information when away from their desks. The proliferation of smartphones and tablets with limited but effective user interfaces is raising expectations. We believe that this year interest in true mobility will start to grow substantially.
The lack of mobility of core systems impacts investment managers in several ways. Consider how many times you check your smartphone or tablet over the course of a day. Now imagine if you could do the same for core business processes and data. Today you probably frequently go into meetings armed with printouts, PDFs or spreadsheets with exported data, all of which is offline.
Of course it’s not just asset managers who expect to be increasingly mobile – it’s everyone, and that includes asset owners. We also expect digitalization to become increasingly the norm throughout 2016 and beyond. Asset managers must deliver a very different digital experience if they are to remain relevant in the future. The trend towards investor empowerment is fueled by two factors: first, investors expect to be provided with the right data whenever and wherever they want it; second, digital is rapidly becoming the de facto form for everyday communication and transactions. The availability of easy-to-use, dynamic, online mobile tools will become commonplace. There is also a growing trend for institutions to adopt these digital tools internally, empowering client services teams to be more productive and cost-efficient when creating presentations, client meeting packs, pitch books, and other client communications.
And finally, yes, it hasn’t gone away… new regulation. A plethora of regulations are set to affect asset managers over the rest of 2016 and beyond, leading them to make operational changes to their front and back office processes. These include the central clearing requirements of EMIR and Dodd Frank, with increased margin requirements for non-cleared derivatives. These are going to affect firms’ collateral management processes with a trend towards tighter integration between the front office and a firm’s collateral management and administration system.
Beginning 2018, under MiFIR, buy-side firms will be required to trade liquid assets on electronic venues, demonstrating increased transparency of costs and commissions associated with their clients’ transactions. Under this regulation, firms will have to report all of their trades to an Approved Reporting Mechanism (ARM). Similarly to EMIR, buy-side firms can outsource this reporting to their broker but they will need to provide them with many more data points than those required under EMIR. For this reason, and to avoid any reporting errors, many firms may choose to connect directly to an ARM.
Based on all the change that we can expect in our industry, asset managers certainly face an interesting short-to-medium term future.
Are there any important aspects that I have missed in my two articles? Feel free to leave a comment below.