We at KPMG believe that there are three disruptive forces at play: Investor divergence, technology and regulation,” announced Anthony Cowell (pictured), Partner at KPMG and Editorial Chair at this year’s Cayman Alternative Investment Summit (CAIS) 2016 organised by DART.
How managers harness those forces by adapting their business models, and pushing the boundaries of innovation, will dictate the winners and losers. This formed the backdrop to CAIS 2016, attended by over 500 of the alternative fund industry’s leading practitioners.
The world is evolving at a rapid pace. There are now 6.8 billion people on the planet, and a staggering 4 billion have a mobile phone. Emoji is the fastest growing language. Regulation has ballooned to include all manner of names and acronyms including Dodd-Frank, Alternative Investment Fund Managers Directive, EMIR, CPO-PQR, FATCA, Form PF, Annex IV; the list goes on.
But as the pace of change increases, so does the scope of opportunities for fund managers to develop new strategies and seek returns for their investors. How and where these opportunities can be harnessed to “supercharge” the alternatives industry was debated in detail across the 2-day event.
Indeed, one of the keynote speakers at CAIS 2016, Jonathan MacDonald, Founder of the Thought Expansion Network, said that today is “the slowest pace of change that we will ever experience. There is no such concept as a fast follower approach. There is a huge opportunity for those that elevate up and disrupt themselves.”
Using cylinders full of gumballs as a unique visual aid, Cowell showed the extent to which alternative fund assets, across hedge funds, private equity and real estate funds, infrastructure and commodities have grown in recent years.
In 2007, USD3 trillion was added to the alternatives industry. In 2008, USD350 billion was wiped out. By 2011, the industry had recovered and added another USD1 trillion. Today, that figure stands at USD8 trillion in AUM.
If pension funds were to increase their allocation to alternative assets by just 1 per cent, the potential volume of `in play assets’ would be substantial, which Cowell illustrated by pouring gumballs into an already full set of cylinders, each representing an alternative asset class.
Cowell highlighted some interesting examples of just how fast the pace of change has become. The average company lifespan on the S&P 500 has collapsed from 60 years to 15 years on average, whilst one of the most successful money market funds didn’t even exist two years ago.
Commenting on investor divergence, Cowell said: “Institutions want transparency, customisation. But the Milllennials have a different outlook on work, on life. They have been raised in the digital age and they are disrupting the industry – running their own portfolio, sharing portfolios. It has become a more open system. Fund managers need to be aware of these forces at work and adapt. It’s important they get their communication right.”=
Technology is having a profound impact on all aspects of life, including the way people invest. Marketplace platforms such as Lending Club and Prosper Marketplace are growing from strength to strength, connecting investors with borrowers wishing to access non-bank financing.
Robo advisors are employing algorithms to invest based on our idiosyncratic desires and risk appetite. Currently, robo advisors are managing USD60 billion of assets. By 2020, that figure is expected to have grown to an estimated USD2 trillion.
Tom Brown, Global Head, Investment Management, KPMG, raised an important question by asking: “How do fund managers get access to that inflow of capital? Big data and machine learning will create an edge among managers and they will be tomorrow’s winners.”
Then there’s blockchain, a permissionless transaction database that Cowell referred to as a real “game changer”. KPMG’s Brown stressed that the vast majority of the investment management industry greatly underestimates the impact of technology. “Not just the extent of disruption but the pace of disruption. It will impact every single aspect of our industry,” said Brown. He added that blockchain technology will “drastically change the way that transactions are processed in global custody business”.
Data – and indeed data management – is at the heart of the alternative investment industry. Some managers are hiring data scientists into the front office and using data analytics to predict customer behavior “but many managers are getting behind. They are struggling with multiple legacy systems and their data is all over the place,” stressed Cowell.
Such is the scope of change, that there are myriad ways that fund managers can adapt their operating models to move with the times. Brown’s point about machine learning is valid. One only has to look at what Ray Dalio’s USD165 billion hedge fund manager, Bridgewater Associates are doing to understand this. They now have a six-person artificial intelligence unit headed up by former IBM executive, David Ferrucci.
Cowell concluded his opening address by saying: “The future is ours to create. Fund managers will need to supercharge their business models and further entrust investors as their investment habits evolve. Knowing is not enough. We must apply.”