A Q&A with Amin Rajan, CEO of CREATE-Research, on the digitization of the alternative investment industry
Technology has transformed countless industries, from transportation to agriculture to manufacturing. And according to Amin Rajan, CEO of CREATE-Research, a U.K.-based think tank that specializes in the future trends in global fund management, the next technological revolution will feature the continued digitization of all industries, including financial services. Cayman Alternative Investment Summit (CAIS) spoke with Amin on how technology is reshaping the alternative investment industry and what tech trends to watch for in 2017. (For more, see: How Hedge Funds Can Do More for Charitable Causes.)
Q: Which technologies will have a transformative impact on the alternative investment industry?
Since 1750, the Western world has experienced three Industrial Revolutions. The first one sparked a large-scale migration from agriculture to manufacturing. The second one sparked a similar shift from manufacturing to services.
In marked contrast, the current revolution is promoting migration to new business models in all industries. This all-pervasive shift is dictated by the emergence of digitization as a world-altering technology: one with the potential to transform products and processes in most industries, giving rise to nimbler business models and improved value propositions.
We see this in the relentless rise of low-budget air travel and e-commerce businesses which, thanks to digitization, have been able to penetrate existing markets, improve the client experience and discover new customer segments long ignored by traditional players.
Digitization has produced a long list of industry-shifting technologies, many just in the last few years. The ones especially relevant to alternative investing include:
- Blockchain: Distributed ledger technology will help disintermediate payments and settlements, thereby reducing costs for all parties.
- Big data and machine learning: The shift from big data to smart data will transform the art of active management by helping investors make better predictions, thereby enhancing the potential for alpha.
- Robo-advisors: Advisory algorithms will allow easy access to portfolio management and disintermediate traditional fund distributors, thereby reducing costs and enhancing the customer experience.
- Cognitive analytics: This technology will enable natural language processing, speech recognition and computer vision, thereby enabling money managers to study the shifting market sentiment via social media and other digital sources.
Q: Which areas of the investment value chain will be most affected by the current digitization revolution?
I think digitization has the potential to permeate every part of the investment value chain. In the front office, digitization will enhance investment capabilities that focus on alpha generation. The new interface between people and machines will transform the way portfolio managers do the investing. In the middle office, robo-advisors will not only facilitate direct selling to end clients, but they will also raise clients' level of financial literacy via various DIY educational tools. In the back office, blockchain will transform functions as diverse as risk management, fund accounting, global custody and transfer agency. (For more, see: Blockchain: The Backbone of Finance's Entire Future.)
Q: What are some of the challenges to implementing or adopting these new technologies?
History shows the revolutionary potential of technology is always moderated by a number factors that slow down both its adoption and the speed of impact. In the alternative investment industry, three challenges are especially pronounced. The first one is the innovator’s dilemma: if it ain’t broke, why fix it? Profit margins are north of 40% for many money managers, so it’s not surprising that the hunger for change has thus far been minimal.
The second challenge is inadequate digital spending. Upgrade costs for some firms may be particularly high if they still rely on old legacy systems, since it will be hard to achieve a high degree of integration with the new generation of digital tools. The third one relates to the lack of necessary management bandwidth to engage in large-scale changes to the existing business models. Change management has not been a valued skill in the past, so important projects can often be delayed or outright canceled.
Q: What will the alternative investment industry look like in five years?
The better question might be what will this industry look like in one year? Or even next quarter? The pace of change across the industry is intensifying thanks to mounting fee pressures, the relentless rise of passive investing, a complex regulatory landscape and changing demographics. All these trends point to one reality - that today’s business models will need a big makeover. Many firms are realizing this and are proactively making big investments in technology to improve their business. It’s only a matter of time before the rest of the industry follows them. (For more, see: How Technology Transformed Portfolio Management.)
This Q&A with Amin Rajan, CEO of CREATE-Research, comes from the Cayman Alternative Investment Summit (CAIS), an annual conference that brings together the world’s leading institutional investors, fund managers, academics, economists, regulators and professional service providers to discuss the pertinent topics shaping the global alternative investment space.