In the last post, we were left with the suspicion that the asset management industry has some work in front of it to be “ready, willing and able” to create value for its investors.
- Are we ready to radically change our processes and infrastructure and mindsets?
- Are we willing to completely restructure our fees and operate with full transparency to be truly aligned with our investors?
- With our existing people, technology and capabilities, are we able to offer real risk-adjusted performance while cutting costs by up to 90% and delivering real-time engagement for our investors?
Changing the industry
In my first post, I talked about the incredible value of finance. The current trajectory of asset management is not creating value for investors. Rather, it seems to be creating value for asset managers! This needs to change.
Here at Noviscient, are working hard to show what is possible in our industry. We are implementing change along three dimensions.
Theoretical framework, business model and technology
We operate within a deep probabilistic modelling framework that can fully handle uncertainty and ambiguity. In essence, this means using a model that offers a more accurate fit to the realities of the financial markets and enables better decision-making.
We are restructuring our business model to focus on performance for investors by partnering with technically-gifted systematic traders from around the world within an incentives structure that is purely profit-share with no management fee.
We use a modern, open-source technology platform to dramatically reduce costs, create scalability and improve the engagement experience for our investors.
In my next post, I will elaborate a little more on what we are doing, and how it allows us to differentiate while creating value for our investors.
In my last post, I discussed the importance of the financial industry for everyone from individual investors to nation-states. It plays a critical role in allocating risk and capital which enables economic growth. I suggested that the mechanism for effective allocation is the fair pricing of securities and that active fund managers are the main agents to make this work. Active managers create value by helping to keep prices fair thereby supporting efficient allocation of risk and capital.
We are now in the 21st century
The world is being changed by automation, machine learning, big data and cloud computing. Information-intensive industries like asset management are right in the line-of-fire. This is more revolution than evolution.
Are active managers ready, willing and able to play this important allocation role?
The muted returns of active managers over the last decade suggest many managers are not keeping up with the required speed of change.
Being ready requires the managers to be prepared to change their processes, their incentives, the mindsets of their people to take advantage of the change. For example, many firms have poor or legacy technology that is no longer fit-for-purpose. Similarly, a workforce that is only familiar with Bloomberg and excel is not sufficient.
The idea of willing is about alignment. Active managers need to radically restructure incentives to be properly aligned with their investors. Much less focus on management fees and up-front fees and more on performance sharing.
Able means having the right approach, infrastructure and capabilities to operate effectively in this new world. That is, to be able to deliver performance at low cost with rich digital engagement with their investors.
Active management has had a lucrative run. But we think the cottage industry phase is over. The time has come for the industrialisation of investment management.
This has three dimensions:
- digitisation of the business to reduce costs and enable scale
- re-imagining the business model to be solidly focused on alignment and performance
- development of capabilities to deliver performance for investors in this new information-dominated world.
I’ll elaborate on these three dimensions in my next post.
A little over twenty years ago I moved from chemical engineering to finance. Interestingly, I still consider myself an engineer. I always figure I can solve any problem, which in the case of chemical engineers is through processes.
I was attracted to finance because it is a technically demanding and very interesting field. Unfortunately, it is also opaque and usually poorly understood. This is a shame because it is very important for everyone in this modern world for finance to operate effectively.
What does it mean for finance to be effective?
It means that capital and risk are allocated appropriately. History is very clear in showing that an economy that allocates risk and capital well grows much faster than an economy with poor allocation mechanisms.
In the public markets, the measure used for allocating risk and capital is the market price. We buy securities that we think are underpriced and sell securities that we think are overpriced. If we get this right, we make money. If we get this wrong we lose money and stop trading.
Benefits of active managers
I believe that active managers (including hedge funds) are the main agents for keeping this allocation mechanism effective. They are more incentivised to find and take advantage of mispriced securities than other industry participants such as banks and mutual funds.
Ready, willing and able
For active managers to be effective in this vital role, they need to be ready, willing and able. That is, they need to have the right infrastructure, the right incentives and the right capabilities. Herein lies both the challenge and the opportunity.
In the next post, I will elaborate on this, and talk about how we are trying to build a business that addresses each of these challenges.
Noviscient has been featured on Bloomberg with an article on new Asian fund startups that are eschewing the 2/20 fee model. We believe that moving to a 0% management fee structure and providing downside offers better alignment for investors by creating incentives to focus on performance and exercising sound risk management practices.
Read the full article at:
We are in one of the most interesting times in investment management. There will be more opportunities to build great businesses than ever before, but they will be different from the past. At Noviscient we are working very hard to re-imagine how investment management can and should work. We are in the process of building one of these great businesses.
From our point of view, the current business model for active management and hedge funds is not working. Fees are high, performance is poor and alignment is low. This is an opportunity but it needs a new approach.
New Business Model
We have boldly and deliberately created a business model and structure to address the shortfalls of the current active manager model. Our business model is centred around our modern, open-source technology platform and an innovative approach to working with great alpha generating partners. The product is a dynamic portfolio of systematic trading strategies.
- 0% Management Fee – we are not rewarded for sitting on money or gathering AUM
- 5% First Loss – a very direct signal about our belief in managing downside risk
- 10% Target Returns – performance fee is 20% on first 10% returns, 50% thereafter
The outcome is that we are fully focused on performance and aligned with our investors on both the upside and the downside.
An Institutional Investor article from a few weeks ago talked about the investment management industry being driven by technology from twenty years ago (1996 called. It wants its tech back).
As a young company, we have no legacy infrastructure or constraints. We can take full advantage of the massive growth in data, computing capabilities and modern machine learning technologies.
If you are interested in understanding more about our business model, or if you have been working on some great systematic trading strategies, contact us at firstname.lastname@example.org. We are keen to talk with people looking towards the future.