Conference Presentation, Panel
Follow the Flow: How Asset Management Is Reshaping the Global Financial System
- The institutionalization of alternative assets is expected to continue as long-term savers, including pension funds and sovereign wealth funds, seek scale sufficient to write checks exceeding $5 billion without over-dispersing allocations.
- Money managers anticipate writing larger checks to address the mismatch between staff growth and Assets Under Management (AUM) growth, creating a tension between the practicality of scale and the legacy of being first-time investors.
- DoubleLine plans to cap growth at double its current size to avoid becoming a trillion-dollar firm, fearing that such expansion would erode differentiated risk-adjusted returns and create excess AUM bloat.
- The global asset management industry is projected to reach approximately $100 trillion by 2020 and potentially $400 trillion by 2050, driven by increasing longevity, wealth accumulation, and inflation.
- Providing unwarranted liquidity in products like money market funds could trigger deleterious effects from localized panic, resembling the dynamics that contributed to the 2008 financial crisis.
- Regulatory focus regarding Systemically Important Financial Institutions may shift toward capital market giants like Blackstone within the next decade if capital markets continue to expand.
- The cost of capital for borrowers may rise as the economic engine of maturity transformation declines and long-term investments become increasingly funded by long-term savers rather than banks.
- If funding costs for private vehicles exceed those of the banking industry, the ultimate cost of capital for borrowers will likely increase.
- Systemic financial risk is predicted to re-emerge through leverage, portfolio insurance concepts similar to 1987, or shadow financing with unreserved premiums, rather than solely through the size of long-only funds.
- Regulators like the SEC and CFTC may take a legitimate role in protecting investors from leveraged products and misleading sales of recent returns.
- The potential loss of the synthetic credit market could expose the large asset management industry to issues regarding transparency, pricing efficiency, and liquidity necessary to support the doubled participation in the US credit market since the crisis.
- Major credit market declines similar to those of 2008-2009 are estimated unlikely to recur within the current investment lifetime due to regulation and smaller broker-dealer balance sheets.
- Approximately 80% of the credit doubling from 2008 to the present has been funded by money managers with daily liquidity claims, creating an unresolved duration mismatch risk.
- The transformation of prime brokerage behavior, driven by regulatory pressure on bank capital costs, is expected to have a major impact on hedge fund leverage and inventory funding.
- Another financial crisis is forecast to arise from an assumption that currently seems logical and risk-free, mirroring the failures of Basel I and Eurozone assumptions.
- Policies aiming to create a "no-risk financial system" may inadvertently cause risk to re-emerge as a problem of very large severity when policies eventually change.
- The Fed's zero interest rate policy, in place for 11 years, is predicted to create risks that are currently concealed and will materialize when the policy shifts.
- "Go-anywhere" or "unconstrained" strategies are predicted to fail in the near future, likened to CDOs due to their lethal potential if they are assumed to be risk-free.
- The concept of "unconstrained" strategies is criticized for being marketed as a "never goes down" concept, which is viewed as unachievable.
- The zero interest rate policy has supported tremendous overcapacity in the asset management industry, a situation predicted to result in a negative outcome.
- The pitch of "unconstrained" strategies is expected to end badly as asset owners market them as capital preservation while they function as risk-seeking, anti-fixed income vehicles.