Conference Presentation, Panel
The Future of Finance
Milken InstituteIzabella Kaminska, Geoffrey Duncombe, Antony Jenkins, Brian Oliver, Omar Selim, Anthony Todd
- Tech giants (Google, Apple, Facebook) are expected to become the largest banks within 10 years, marking a shift away from traditional entities like Barclays or JP Morgan.
- Rising interest rates and negative mark-to-market scenarios are predicted to drive capital flow into equities across five global asset classes.
- A positive correlation is anticipated between corporate ESG performance and stock prices, contradicting the historical view that responsible finance drags performance.
- Trading based on intuition is expected to disappear as computers emulate human decision-making capabilities more effectively.
- Sustainable finance is predicted to become mainstream within 10 years, with the majority of vehicles transitioning to electric power, serving as a similar transformation where non-financial data and algorithms generate alpha.
- Investors will not need to sacrifice performance by adopting sustainability approaches, which are increasingly viewed as a smarter investment strategy and risk management tool.
- The closure of people and bank branches, initially estimated at 50% two years prior, is accelerating due to underlying technologies and "Uber moments" in financial services.
- A fairer, transparent, secure, cheaper, and faster financial system is anticipated that benefits end users but challenges incumbent institutions.
- Energy consumption issues in crypto mining are expected to be resolved, though systemic control remains a critical unresolved challenge.
- Cryptocurrencies are foreseen as a powerful force capable of creating a universal currency that eliminates significant friction in international trade.
- Machine learning and big data introduce a risk of overfitting models on spurious correlations, particularly as market barriers to entry lower and strategies become crowded.
- Widespread model overfitting may cause volatility to drop artificially, potentially triggering a "disorderly regime change" or a once-in-100-year, 20-sigma event.
- Strategies based on spurious correlations face performance erosion risks as the market becomes crowded with similar approaches.
- The next 10 to 20 years will differ from the previous 35 due to the end of tailwinds like declining inflation and interest rates, necessitating uncorrelated performance streams.
- Investors are expected to seek steady returns over the next 10 to 15 years, a profile quantitative firms can provide through multi-strategy programs.
- Static, rules-based strategies without research are predicted to generate disappointing returns as the market evolves and risk-premium barriers fall.
- ETFs in the higher-yielding and credit space may offer an illusion of liquidity, creating risks where investors cannot access promised liquidity during crises due to underlying illiquid instruments.
- Technology can reduce inefficiency and costs but cannot alter human behavior, leading to increasing importance of second-order consequences such as privacy and data ownership battles.
- Increased data precision could lead to a highly stratified society where communities are blacklisted from credit or limited by behavioral data, potentially opening credit to previously excluded groups.
- The premium for sound judgment and expertise will likely increase as finance automates, maintaining relevance for financial professionals and driving hiring growth alongside compute power.
- Productivity in fixed income markets is expected to increase, allowing firms to deliver higher service quality with fewer people compared to historical incumbents.
- Universal basic income may be considered as policy action in the coming years to address inequality, requiring skilling, infrastructure, and regulation as necessary levers.