What's Driving the Asset Management Industry Today?

Passive Investing Trends and Market Structure

• 90% of daily equity flows in the U.S. are passive (including leverage and turnover).
• Michael Frino argues active management retains merit in developing markets, below-investment-grade credit, and illiquid sectors where alpha generation is still possible.
• Michele Gesualdi posits that passive investing acts as a market correction, replacing substandard active managers and potentially polarizing the industry into passive and alternative strategies (projected to reach 50% of global assets).
• Rick Lakai warns that a shift toward passive investing reduces the capital available to bet against market downturns, potentially creating an "autopilot" selling mechanism during corrections that lacks the depth of 10 years prior.
• Greg Williamson contends passive flows reflect central bank reinflation (beta is cheap) rather than driving the market, suggesting a return to active management will occur when inflation rises or rate cycles shift.

Market Outlook and Economic Drivers

• The panel maintains a positive outlook for a bull market extending 18 to 24 months, supported by $300 billion monthly additions to central bank balance sheets.
• Inflation remains the primary macroeconomic variable capable of disrupting global coordinated growth and forcing aggressive central bank action.
• The Federal Reserve is expected to pause significant rate hikes in 2018 to avoid flattening the 2-to-10 and 10-to-30 yield curves, which would damage U.S. economic development.
• The industry anticipates a regime change in global liquidity as central banks move to remove accommodation, contrasting with the $15 trillion previously injected into asset classes.
• Geopolitical risks identified include Brexit uncertainties and potential political instability in Italy, though the latter may result in a "status quo" of frequent government changes without major policy shifts.

Technology, AI, and Industry Disruption

• Blockchain and distributed ledger technology are viewed as tools to improve back/middle-office efficiency, reduce payments friction, and increase transparency for investors regarding portfolio holdings.
• AI and machine learning are expected to disintermediate traditional roles, including custodians (potentially replaced by entities like Amazon Finance) and consultants within the next 5–10 years.
• The industry faces a bifurcation where only top-tier quant firms or niche players will survive; the "middle" managers risk being squeezed out unless they adopt technology or shift to illiquid/alternative strategies.
• AI algorithms do not converge on a single outcome because they rely on distinct datasets and training parameters, allowing for varied investment strategies rather than a new form of passive indexing.
• The panel predicts a shift from public to private markets, driven by a shortage of public IPOs, higher valuations in private assets, and the rise of evergreen funds that prioritize long-term holding.

Fee Structures and Alpha Generation

• Greg Williamson argues the standard performance fee for active managers should return to a 20% share of returns (carried interest), down from the current 30–35% levels seen in hedge funds.
• Michele Gesualdi cites Norges Bank as a model for fee structures, utilizing low management fees combined with high performance fees, a model she deems sustainable.
• Rick Lakai notes that beta is becoming a near-free commodity (e.g., S&P 500 exposure <1 basis point), meaning investors will only pay for scarce alpha.
• The consensus suggests that active managers must demonstrate net alpha after fees to justify their existence, as the market is increasingly driven by cost efficiency and factor-based strategies.

Cryptocurrencies and Regulation

• The panel distinguishes between Bitcoin (viewed as a speculative asset with valuation challenges) and blockchain technology (seen as a transformative infrastructure tool).
• Greg Williamson highlights the fundamental incompatibility of Bitcoin as a deflationary asset with the monetary needs of modern economies backed by debt.
• Michele Gesualdi notes that while Bitcoin is difficult to value, it represents a new asset class suitable for indexing once regulatory hurdles regarding money laundering and transparency are addressed.
• No panelist announced immediate plans to launch Bitcoin investment products for clients, citing current regulatory and structural uncertainties.

Regional Focus: China and Asia

• Chinese institutional investors (e.g., sovereign wealth funds) are described as sophisticated in risk management, AI adoption, and portfolio construction, often surpassing Western peers in private equity.
• Regulatory changes in China are expected to shift the purpose of finance toward fueling the real economy, potentially altering fee structures and asset allocation strategies.
• The "1 in 30" fee model (1 basis point fixed, 30% of profits) was debated; while deemed viable for some, many panelists view it as too expensive compared to a "zero fixed, 20% profit" structure.

Q&A Highlights

• AI Due Diligence: Greg Williamson suggests investors must hedge AI strategies with downside protection due to the "black box" nature of algorithms and inability to explain marginal risk contributions.
• Private Tech Liquidity: Michele Gesualdi emphasizes that in the VC space, success relies on human relationships and network access rather than capital alone, as deals are allocated to the most connected firms.
• IPO Pipeline: The lack of tech IPOs is attributed to high private valuations and the desire of founders to remain private as long as capital is available and regulatory burdens are lower.