The landscape of active asset management is at a critical juncture. This sector has flourished for years, buoyed by high fees and increasing asset volumes. However, the rise of passive investing has significantly disrupted revenue streams, compelling managers to confront mounting pressures on profit margins. The ongoing struggle to generate alpha is exacerbated by rising costs associated with maintaining large teams and sophisticated data infrastructures.
Firms are caught in a vise-like grip: on one side, declining fees and low inflows; on the other, the burden of rising costs driven by regulatory demands, cybersecurity threats, and the maintenance of complex technological systems. The challenge has evolved beyond performance; it now includes managing the cost of generating that performance.
Cost management in a competitive environment
Many firms have sought to address these cost pressures through traditional cost-reduction strategies. However, these measures often fall short of offsetting the relentless fee compression that characterizes the current market. Substantial investments in technology and artificial intelligence aimed at alleviating these issues have, paradoxically, sometimes compounded them. The persistence of legacy systems remains a significant obstacle, consuming both financial and human resources.
Tech investments and their implications
Recent analyses show that a significant portion of technology budgets—ranging from 60% to 80%—is allocated solely to sustaining existing systems. This allocation leaves limited opportunities for genuine innovation. Furthermore, even when new technologies are introduced, resistance from personnel can hinder their effectiveness. Portfolio managers and analysts often express concerns about relinquishing control or fearing obsolescence in the face of automation.
For Chief Investment Officers (CIOs), the key to transformative success lies in fostering a cultural shift. The focus should pivot from viewing AI as a potential replacement for human expertise to positioning it as a tool that empowers professionals. This shift allows them to engage with high-stakes decisions that drive value.
Reimagining the investment process
It is crucial to recognize the lost opportunities when highly skilled portfolio managers engage in tedious data collection instead of concentrating on strategic decision-making. The industry is full of discussions about innovation, yet concrete frameworks for implementation are scarce. To advance, asset managers must reevaluate their investment processes, developing a new model that emphasizes both efficiency and human insight.
Building an innovative alpha generation framework
With extensive experience in managing institutional portfolios exceeding €1.6 billion in assets under management, I have conceptualized a comprehensive blueprint designed to minimize the cost of generating alpha. This framework not only addresses fundamental costs but also integrates advanced AI capabilities to enhance decision-making.
For instance, a live application of this model identified a notable valuation anomaly with IHI Corporation, a Japanese firm. Traditional screening methods overlooked this discrepancy, but our model flagged it for immediate scrutiny. Within hours, the portfolio manager assessed the company’s fundamentals, verified the mispricing, and executed a trade based on this insight. This example illustrates how a Human+AI investment strategy can significantly enhance the alpha generation process.
Creating a sustainable competitive advantage
The new investment framework consists of four key pillars, all designed to enhance transparency and accountability in how human judgment and machine intelligence collaborate. This model ensures that humans retain control throughout the investment lifecycle, not merely as final decision-makers, but as architects of the investment strategy.
Investors continue to seek opportunities to outperform the market but are increasingly reluctant to incur high fees for subpar results. Active managers who successfully lower the costs associated with alpha generation will regain their competitive edge against passive options. For investment leaders, particularly CIOs, the imperative is clear: the future will favor those that optimize their workflows rather than simply adding new technologies.
Focus on continuous improvement
Firms are caught in a vise-like grip: on one side, declining fees and low inflows; on the other, the burden of rising costs driven by regulatory demands, cybersecurity threats, and the maintenance of complex technological systems. The challenge has evolved beyond performance; it now includes managing the cost of generating that performance.0
Firms are caught in a vise-like grip: on one side, declining fees and low inflows; on the other, the burden of rising costs driven by regulatory demands, cybersecurity threats, and the maintenance of complex technological systems. The challenge has evolved beyond performance; it now includes managing the cost of generating that performance.1
Firms are caught in a vise-like grip: on one side, declining fees and low inflows; on the other, the burden of rising costs driven by regulatory demands, cybersecurity threats, and the maintenance of complex technological systems. The challenge has evolved beyond performance; it now includes managing the cost of generating that performance.2