[One thing that the history of innovation teaches us is that it is not just new technology that is needed, but how you use that technology in relation to your particular challenges that is the key to adopting to change. Many times, combining the best of something traditional with the best of something new tends to create a powerful step forward to carving a new path. Learning to deliberately combine these seemingly opposing factors into a hybrid approach has been the basis of many innovations across industries.
Due to the changing nature of the investment markets adding to the increasing complexity, uncertainty and volatility of our current environment, there is a great need for new tools and approaches to the investment process and risk management. In response, there is a growing number of emerging FinTech and advanced analytics tools evolving that are unfortunately not being adopted fast enough because of personal fears of disruption and being rendered obsolete in the eyes of clients.
The history of innovation also clearly documents that these fears always appear at these junctures and slow the much-needed adoption of new tools and approaches. But as the saying goes that is most relevant to our situation today — the only thing to fear is fear itself! In an environment of accelerating change, this is the time to be forward-looking and brave in experimenting and trying new approaches. There is no standing still or going backwards to hold on to a nostalgic business notion.
To help address this fear among many advisors and asset managers in deploying new technology in the investment process, we asked Institute member Rocco Pellegrinelli, CEO of Trendrating — a Swiss company providing advanced price trend capture analytics for RIAs and active investment managers — to help us think this out together and address this limiting mindset. The truth is that we need to see how an advanced analytics tool can complement any investment methodology and be purposely controlled and directed by the money manager, not the other way around.]
Bill Hortz: What are some of the biggest challenges facing fund manager in today’s market?
Rocco Pellegrinelli: The active management of equity portfolios and funds has been facing increasing challenges over the past decade. Biggest of all is that fundamentals and price trends are often out of synch, as the actual trends are driven by large institutional money flow that is often influenced by a complexity of other factors including social media sentiment, 24x7 global news coverage, and macro-economic and political events. Generating superior and sustainable performance in this environment is difficult, as evident in the track record of mutual funds where 70% of managers underperform their relevant benchmarks (Source: S&P SPIVA Report).
The only logical way to combat these challenges is by adopting innovative technology solutions that are capable of processing “big data” in a way that doesn’t replace the fund manager but can do the work of an expensive team of data experts.
At the same time there is a growing pressure on investment firms to stay profitable, pressuring executives to find ways to make their operations more efficient and drive down costs. Most firms cannot afford to hire a team of quantitative analysts and software developers to automate key aspects of their investment process. Fintech vendor solutions can fill a critical gap to asset managers in this regard.
Hortz: Are you then advocating a form of robo management for RIAs and asset managers?
Pellegrinelli: Not exactly. The term “robo” is often misconstrued by the media as a cyborg replacing humans when, in reality, it simply refers to a technology tool or platform. We see portfolio managers still in charge of choosing the underlying investment universe, constructing the portfolios, and inputting all the decision criteria. In this hybrid approach, the portfolio manager selects the investment universe of choice, runs it through their existing investment selection filter first, and then assigns a set of rules and mandates for the analytics system to make decisions objectively, without the usual discretionary traps of bias or intervention.
Many top-tier hedge funds have relied on computer-driven models run systematically based on the inputs of their creators. But there are thousands of firms that cannot afford all that is necessary to hire the proper people to build their own tech platform around their investment analysis process. But now with vendor-provided solutions hitting the market, the dynamic is shifting for small-medium sized fund managers and RIAs to take advantage of cutting-edge technology to compete with the major players.