Meanwhile, regulatory and compliance costs are rising rapidly. The post-MiFID need to pay for research or bring it in-house raises expenses. Funds will need to explore major changes in their fee structures, perhaps charging for performance on realized returns, or for expenses only.
There are things fund managers can try to improve performance. They might focus on absolute returns rather than their performance relative to market indices. They could adopt dynamic portfolio composition, which allows unconstrained allocation between asset classes, or permit funds to go both long and short. They’ll need to increase active trading, the use of derivatives or structured products, and leverage. Fund structures will have to incorporate long lock-up periods to reduce redemption risk and allow for investments with different liquidity profiles.
Such measures, however, won’t increase returns for everyone in the zero-sum world of markets, where someone’s gain is another’s loss. The asset-management industry may bifurcate into a few large, index-fund managers exploiting economies of scale and smaller, specialized managers taking advantage of their expertise in specific strategies. For many large and mid-sized asset managers, on the other hand, an inability or unwillingness to change will mean increasing irrelevance.
This article provided by Bloomberg View.