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EY Survey: Institutions’ Renewed Interest in Alts Creating AI Conundrum for Managers

Increased institutional interest in the alternatives asset class is creating more pressure than ever on asset managers to provide increasingly sophisticated and nuanced data gathering services at lower fees, according to the just published 2018 Global Fund Alterative Survey from Ernst & Young. “Institutions are engaging with alternatives asset managers in new ways—these can include separately managed accounts and customized structures and exposures, which allow institutions a certain level of transparency and control over assets,” Samer Ojjeh, author of the report and principal at Ernst & Young (EY), told Institutional Allocator in a phone call before he presented the findings of his survey in New York on Monday. “This creates a lot of pressure on asset managers to respond operationally.”

Samer Ojjeh, EY

Seventy four percent of PE managers surveyed by EY do not expect to use artificial intelligence (AI), according to the report, the full title of which is At the Tipping Point: Disruption and the pace of change in the alternative asset management industry, The 2018 Global Fund Alternative Survey. Yet one of the few solutions available to asset managers to relieve tightening cost margins is to increase the automation of their services. But using AI is a double-edged sword: The more managers are drawing upon the same data sets, the less likely they are to come up with unique investment solutions, Ojjeh noted.

The alternatives industry will be especially affected by AI, which will pit managers against each other competitively, according to the report. “Many alternatives managers are using similar data sets, due to there being too much demand in the market,” Ojjeh said. “The proliferation of AI may cause managers to lose their competitive edge,” he said. “At the same time, the use of automation is the cost-effective answer to mitigate risk and pressure on managers’ margins.”

Thirty four percent of hedge fund survey respondents have made an investment of either personnel or technology into robotics to leverage in middle and back-office operations, while just one percent of private equity managers have done the same, within the past year. Meanwhile, just 11% have made an investment into AI and none of the private equity respondents have done so. Robotics and AI technology can confirm trades, reconcile positions and automate regulatory reporting filings, among other tasks—freeing up managers from manual work to perform more value-add activities.

Of the hedge fund managers who have invested in robotics, 86% reported they are using these tools to benefit the middle office, the report continued. Middle office has the biggest need of these tools based on the high volume of daily tasks associated with settling, confirming, reconciling and valuing assets. Two-thirds of those managers who are not currently utilizing robotics indicated they have minimal to no knowledge of what offerings are even available. This lack of awareness increases slightly when managers are asked what they understand their service providers can perform with robotics. The fact that only 40% of those managers who have implemented robotics believe they are fully aware of technology capabilities demonstrates the learning curve that is associated with this technology, the report noted.

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