The landscape of active asset management is undergoing significant transformation. After years of robust growth driven by high fees and increasing assets, active managers now face persistent pressure on profit margins. This shift is largely attributed to the rise of passive investing, which has profoundly affected revenue streams, while expenses related to generating alpha, or excess returns, continue to rise due to the need for large teams, sophisticated data analysis, and substantial infrastructure.
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.
Challenges of technology adoption in asset management
While technology was expected to alleviate some of these challenges, the reality has often been quite the opposite for many firms. They have invested heavily in artificial intelligence and automation, but the majority remain tethered to outdated systems that consume resources and complicate operations, resulting in what can be termed a complexity tax.
A significant portion of technology budgets—between 60% and 80%—is allocated to maintaining existing systems rather than fostering innovation. When new tools are introduced, they frequently encounter resistance from employees, particularly portfolio managers and analysts, who fear losing control over their work or jeopardizing their job security.
Cultural transformation in investment processes
The key to successful adaptation lies in a cultural transformation for Chief Investment Officers (CIOs). Rather than viewing AI as a replacement for human expertise, it should be embraced as a tool that enhances and empowers skilled professionals, allowing them to focus on high-value decision-making.
The industry is rife with discussions about improving processes, but tangible, actionable strategies are often lacking. A critical aspect of this transformation is recognizing the high opportunity cost of having highly paid portfolio managers engage in manual data collection, rather than concentrating on the strategic elements that truly drive alpha.
Redesigning the investment process for efficiency
To break free from the constraints of high fees and escalating costs, asset managers must rethink their investment processes. This involves creating a new model for generating alpha—an alpha factory—that is both scalable and efficient, while still prioritizing human insight.
Drawing on extensive experience in managing institutional portfolios and developing Human+AI investment frameworks, I have created a comprehensive blueprint designed to significantly reduce the cost of producing alpha by addressing the underlying issues.
Case study: real-time application of the new model
During a live trial in early October, my model identified an unusual pricing discrepancy involving the Japanese firm IHI Corporation, which traditional screening methods overlooked. This alert triggered an immediate assessment of the company’s fundamentals. The portfolio manager quickly verified the factors at play, deemed the misvaluation legitimate, and established a position. This scenario was part of a practical test of the Human+AI framework, designed to evaluate its effectiveness in reducing the cost of alpha.
The new alpha generation model is built on a transparent framework with four core pillars, ensuring clarity in how human judgment integrates with machine intelligence. It positions human experts not as mere overseers but as the architects of the entire investment portfolio.
Future outlook for active managers
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.0
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.1
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.2
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.3
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.4
Many firms have tried to mitigate costs through conventional means, but these efforts often fall short of keeping pace with ongoing margin erosion. Challenges from regulations, cybersecurity threats, and the maintenance of technological systems further complicate matters. Asset managers find themselves squeezed between decreasing fees and sluggish inflows on one side and increasing or fixed costs on the other. Consequently, the focus has shifted from merely delivering performance to managing the cost of alpha.5