Is a golden age starting for asset management?

June 27, 2014  

It may just transpire that 2014 is the year when the wheel turned and regulation became less of a minefield and more of an opportunity

By Nick Evans

Few central bankers have emerged from the financial crisis with their reputations more burnished than Andy Haldane – the former executive director for financial stability and now chief economist at the Bank of England, and a man widely seen as the Old Lady’s rising star.

So when Haldane made a speech to the London Business School’s Asset Management Conference recently entitled "The age of asset management?", it was a pretty strong signal that asset management is now somewhere near the top of the agenda for the world’s key regulators and policy-makers.

That may not necessarily be a good thing in every respect, needless to say. Increased official scrutiny of investment managers will inevitably bring increased burdens and increased costs.

But it is an important recognition of the central – and increasingly influential – role that the asset management sector plays in the global financial system, in a transformative period of change when banks are shrinking under the weight of new regulation and more conservative management.

And it underlines the key function that asset managers can and must perform in financing the economy, at a time when banks are pulling back from some of their traditional financing and risk-taking activities – and at a time when enterprises of all shapes and sizes need to develop new sources of finance to fill the gaps left by the banks’ retreat and to stimulate global economic growth.

Clearly the primary and vitally important purpose of asset managers is to manage the ever-growing savings and wealth of institutional and individual investors around the world, at a time when it is more critical than ever that those are managed in the best and smartest possible way – a purpose in which hedge funds are now widely accepted to have an essential role to fill.

But the opportunities for asset managers, hedge funds included, to move into new areas are huge – and growing by the day. As a recent academic paper commissioned by AIMA made clear, hedge funds and other types of asset managers have an increasingly significant part to play in financing economies, companies and growth.

It is entirely in the interest of politicians and regulators to enable that to happen, by encouraging the development of capital market financing sources outside the shrinking banking sector.

Shadow banking (a horrible phrase, but one that is here to stay) is a big theme, and a big trend. Already it is enabling hedge funds to get into all kinds of new areas and new businesses. And encouragingly, the signs are that a more reasoned public policy debate is starting to get going as to the contribution that shadow banking can make.

As a recent investment management paper from KPMG said: "The shrinking of the banking sector has thrust asset management to the heart of global capital flows. That creates huge opportunities for investment managers. But it also marks a step-change in the scrutiny of the sector."

Shadow banking will be one area where there will be more scrutiny, and rightly so. But regulation and increased oversight will more broadly be an inevitable fact of life in a world that is still trying to recover from the greatest financial catastrophe that has been seen for generations.

The new regulations may well not be perfect – and in some cases they may well do more harm than good. That is always the way. But all one can really ask for in regulation at the end of the day is clarity – and that is now largely here.

It is the lack of clarity and certainty over the last few years that has been so damaging to hedge funds over the last few years. But with AIFMD coming into effect next month, and with other major pieces of new regulation such as Volcker, EMIR, FATCA and new UCITS frameworks either in place or close to being finalised, the regulatory landscape for asset managers is a good deal clearer than it was.

As the KPMG paper goes on to say: "It may just transpire that 2014 is the year when the wheel turned and regulation became less of a minefield and more of an opportunity."

At a top-tier policy-making level, the recognition that some asset managers (only the very largest ones, though) are systemically important marks a critical shift in the way that asset management is seen and treated. There are pluses and minuses to that, of course. But the opportunities for growth and profitability are huge.

PwC estimates that the global asset management industry will grow by 50% from $64 trillion to $100 trillion by 2020. Citi reckons that hedge fund industry assets will double in the next five years. McKinsey reports that profitability in the asset management industry is back above pre-crisis levels – despite the rising compliance and compensation costs. There is optimism wherever you look.

The price will be greater scrutiny, more regulation and increased costs. But the prize is a much larger world in which to operate, a much wider pool of investors with which to engage, and a much richer opportunity set all round. So, on balance, the prize should be well worth the price. And it is quite possible – perhaps very likely – that this will indeed be 'the age of asset management’.

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