The landscape of active asset management is undergoing significant transformation. After a period of robust growth driven by elevated fees and increasing assets, the industry is now encountering considerable challenges. Asset managers face persistent pressures on profit margins as the rise of passive investing continues to erode revenues. Additionally, the costs associated with generating alpha remain high due to the necessity for large teams, complex data analysis, and substantial infrastructure.
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.
Redefining the role of technology in investment management
While technology was anticipated to alleviate these pressures, it has, in several instances, exacerbated the situation. Many firms have invested heavily in artificial intelligence and automation, but these investments have not effectively reduced costs. A significant portion of resources is consumed by outdated legacy systems, leading to a growing complexity that hampers innovation and efficiency.
Data shows that between 60% to 80% of technology budgets are allocated to maintaining existing systems, leaving scant resources for genuine innovation. Furthermore, even when modern tools are deployed, resistance from personnel can undermine their efficacy. Portfolio managers and analysts often feel threatened by the prospect of losing control over their roles, which can limit the potential benefits of new technologies.
Cultural transformation as a key to success
For Chief Investment Officers (CIOs), the path forward necessitates a fundamental shift in culture. True transformation occurs when AI is harnessed to enhance the capabilities of human experts rather than replace them. This approach allows teams to concentrate on critical decision-making processes that deliver the highest value.
There is a notable opportunity cost associated with highly skilled portfolio managers dedicating their time to manual data collection instead of focusing on strategic judgment calls. The active management sector is replete with discussions about innovation, yet practical, actionable blueprints remain scarce.
Creating an efficient alpha generation model
To navigate the challenges of shrinking fees and rising costs, asset managers must rethink their entire investment process. Developing a new model for alpha generation—one that combines efficiency and scalability while emphasizing human expertise—will be critical for success.
Drawing from over two decades of experience managing institutional portfolios exceeding €1.6 billion in assets under management, I have crafted a comprehensive blueprint designed to reduce the costs associated with alpha generation by tackling the underlying issues.
For example, a live test conducted in October revealed a significant valuation disparity in the Japanese company IHI Corporation that traditional analysis had overlooked. This alert triggered an immediate assessment of the company’s fundamentals. Within hours, the portfolio manager confirmed the authenticity of the mispricing and initiated a position, demonstrating the potential of a well-structured Human+AI investment process.
Building a transparent alpha factory
The proposed model consists of a four-pillar framework that is both transparent and auditable, clearly delineating the collaboration between human judgment and machine intelligence. This structure ensures that human expertise remains central, not merely as a final check but as the driving force behind the entire portfolio.
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.0
Future strategies for active managers
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.1
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.2
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.3
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.4
Firms have attempted to cut costs through traditional methods, yet these savings often fall short of addressing the ongoing decline in profit margins. Alongside diminishing fees and weak inflows, asset managers are burdened by increasing regulatory demands, the need for enhanced cybersecurity, and the upkeep of technology. This creates a challenging environment where costs are rising while revenues are falling.5