The co-authors include:
Katina Stefanova (Founder/CIO of Marto Capital and former sernior executive at Bridgewater Associates, the world's largest hedge fund)
David Teten (Partner at a New York venture capital fund; see his blog at teten.com)
Steve Young, Principal at Citisoft
Without further ado, here's the excerpt:
Based on the problems and global trends uncovered in our research, we outline below the five characteristics that will differentiate the winning money manager of the future.
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 acceleration toolkit, typically including experienced operating executives and a set of preferred operational service providers.
Invest in talent and culture as the critical foundation
The investment industry is today very immature in its human capital management, with high turnover, minimal succession planning, and a strikingly homogeneous work force. As founders age and investor demographics change, the established investment firms will face a talent crisis and will have to rethink how to attract, develop and retain talent. “Purpose driven companies,” says Jeff Hunter, CEO of Talentism, “are more likely to have employees who exhibit cohesive behavior and act in the best interest of the company and the investors.” Thus, we foresee a professional CEO role emerging in asset management: She will be fully focused on leadership as distinct from the traditional CIO and VP of Sales. It’s worth noting that some of the leading asset management firms, including D.E. Shaw and Blue Mountain, are leading the way by being proactive and mindful about managing their culture and principles.
If you want to dive deeper, download the full study in PDF format (10,000 words).
To read the article, Asset Managers, Prepare To Have Your Business Disrupted, click here. (10,000 words).