The world of active asset management is experiencing significant changes as firms face unprecedented pressures on profit margins. The rise of passive investing has disrupted traditional revenue streams, leading asset managers to rethink their strategies and operational frameworks to adapt to this new environment.
Historically, the industry has depended on large teams and complex data systems to generate alpha, or excess returns above the market. However, escalating costs, dwindling fees, and limited capital inflows have created a challenging situation. Many firms now find themselves balancing declining income against rising operational expenses.
Understanding the current challenges
Despite efforts to cut costs through traditional measures such as downsizing, many firms discover that these savings do not adequately address ongoing margin compression. The added complexities from regulatory requirements, cybersecurity threats, and the need for technological upkeep exacerbate the issue. This results in a structural dilemma for asset managers: diminishing revenue streams clash with increasing or fixed costs.
The role of technology in asset management
Initially, the promise of technology was to alleviate these burdens. However, years of investment in artificial intelligence and automation have often yielded disappointing results. Many companies remain entrenched in outdated systems that consume valuable resources and complicate operations instead of streamlining them. Reports indicate that a staggering portion of technology budgets—between 60% and 80%—is dedicated solely to maintaining existing infrastructure, leaving limited room for innovation.
Resistance from personnel can also hinder progress when implementing new technologies. Portfolio managers and analysts may fear that technological advances will diminish their roles or undermine their decision-making authority. Therefore, Chief Investment Officers (CIOs) face the challenge of fostering a cultural shift that emphasizes collaboration between human expertise and AI capabilities. The aim should be to view AI not as a replacement but as a means to enhance the capabilities of skilled professionals.
Redefining the investment process
To navigate the challenges of rising costs and lagging alpha generation, asset managers must fundamentally rethink their investment approaches. A critical aspect of this transformation involves creating an efficient and scalable model that prioritizes human insight while integrating advanced technologies. By reimagining the investment process, firms can develop a new type of alpha factory that harnesses both human judgment and machine intelligence.
A practical blueprint for success
Drawing from over two decades of experience managing institutional portfolios and implementing Human+AI investment processes, a comprehensive blueprint has been crafted to significantly reduce the costs associated with generating alpha. For example, in early October, a model identified an uncommon valuation discrepancy in IHI Corporation, a Japanese firm. Traditional methods had overlooked this opportunity, but the alert prompted an immediate investigation into the company’s fundamentals.
The portfolio manager quickly assessed the situation, confirmed the validity of the mispricing, and acted on it—demonstrating the potential for technology to enhance decision-making rather than replace it. This live testing of the Human+AI framework allowed for real-time measurement of its impact on alpha generation.
The proposed model features a transparent and auditable structure that clarifies the collaboration between human analysts and AI. It positions the investor as a pivotal figure, not merely as an overseer but as the architect of the entire portfolio strategy. By doing so, firms can rekindle investor interest in active management while addressing cost concerns.
The path forward for active managers
Investors continue to seek opportunities to outperform the market, but their willingness to pay high fees for lackluster results has diminished. Active managers must find ways to deliver value by significantly lowering the costs of alpha generation. Investment leaders, particularly CIOs, carry the responsibility to innovate workflows rather than simply adopt new tools.
Historically, the industry has depended on large teams and complex data systems to generate alpha, or excess returns above the market. However, escalating costs, dwindling fees, and limited capital inflows have created a challenging situation. Many firms now find themselves balancing declining income against rising operational expenses.0
Historically, the industry has depended on large teams and complex data systems to generate alpha, or excess returns above the market. However, escalating costs, dwindling fees, and limited capital inflows have created a challenging situation. Many firms now find themselves balancing declining income against rising operational expenses.1