What's top of mind for mutual fund and ETF managers today? Many firms would say that liquid alternatives and Big Data are very high on their agendas. NICSA explored these two priorities at its workshop "Megatrends in the Fund Industry" which was held in Los Angeles in May.
Liquid alternatives. Admittedly, it's hard to imagine a fund industry where regulation isn't taking up all the bandwidth, as it has since 2008. But now that the outlines (if not all the details) of the post-credit crisis regulatory regime are in place, the industry can focus again on generating growth - and liquid alternatives funds have become a key driver of that growth.
The fact is, assets in liquid, or retail, alternative funds have been soaring. These funds use hedge-fund investment techniques, including leverage and short-selling, in a mutual fund format that can be sold to the general public.
The growth of liquid alternatives has been demand-driven, as investors -- disenchanted with the volatility in the stock returns and low bond yields -- search for greater diversification and protection on the downside. And the NICSA panel of experts, from Brown Brothers Harriman, EY and Franklin Templeton, believe that the demand will be sustained.
As a result, almost everyone in the investment industry - both hedge funds and traditional mutual fund and ETF managers - are exploring the market. But it's not clear which type of firm has the edge in sponsoring this type of fund.
Hedge funds may have more experience with the investment techniques, but none at all with the extensive regulations that govern fund operations. Traditional fund managers may have the retail distribution networks needed to drive asset growth, but could find that the more aggressive liquid alternatives funds don't mesh well with their brand image.
For both types of firms, liquid alternatives funds place heavy demands on investment operations and compliance. Extensive use of derivatives, short sales and leverage requires sophisticated approaches to collateral management, while holdings of less liquid securities, swaps or options pose valuation challenges. Compliance teams need new techniques for monitoring these complex strategies.
And it's not just compliance teams that are keeping their eye on liquid alternatives; the SEC is also watching to the growth in this category. As keynote speaker Robert Robertson from Dechert noted, the SEC worries that liquid alternatives are an appealing "bright, shiny object" with a less-obvious sharp edge. Given the SEC attention to this area, asset managers should be sure to have their compliance programs in order.
Big Data. It's no longer just talk; Big Data is becoming a fact of life in the fund industry.
There are a lot of reasons why data analytics has been slow to take hold in asset managers. First of all, asset gathering has been easy even without advanced market intelligence. Advisors have had other priorities, often as the result of new regulatory mandates. The required technology was too expensive for the midsized firms that dominated the business. And investment data is almost exclusively in proprietary databases and hard to access; there's little open-source sharing in the investment industry world.
But, as panelists from InvestCloud, State Street and PwC explained, many of those barriers have crumbled in the last few years, just as asset managers have come to realize that they are missing out on the insights that data can provide. A recent State Street study found that while 9 out of 10 managers view data as a strategic priority, less than a third thought they were actually getting an advantage from that data.
That doesn't mean that implementing Big Data approaches will be a walk in the park. Investment firms are still operating on a T+1 batch basis and will have to realign processes to work with intraday data. Technology pieced together from multiple systems will need to be streamlined. And the expanding variety of the data involved - which can include social media, video and voice recordings - will pose challenges for both storage and analysis.
Firms that have become leaders in the use of data have made their technology more efficient and abandoned large data warehouses, replacing them with a more flexible approach to sourcing information. More importantly, leaders don't just use data analysis to describe the past; they rely on predictive analytics to drive decisions.
Of course, Big Data has its dark side, which is that it's more easily stolen than the paper-based records of old. As a result, firms that want to get involved need to invest as much in cybersecurity as to the analytics.
Certainly, the SEC is paying attention to how firms are protecting their data, as keynote speaker Robert Robertson reminded the audience. Its Office of Compliance Inspections and Examinations is asking detailed questions about data governance policies, and firms will want to be prepared to respond.
Theresa Hamacher is president of NICSA.
