For alternatives managers and their super fund clients, in particular, the five biggest themes in the investment world are here and deserving of attention. Simon Lorne, vice chair and chief legal officer of New York-based Millennium Management spelled them out last week.
Lorne, who is also global chair of AIMA, the alternative investment management body, provided the opening keynote address at the AIMA Australia Forum on September 12. The Forum, in Sydney, set a record for attendees – more than 450 – and had an expanded agenda. The five big themes, which are as equally relevant to traditional asset class investors as alternative managers, are:
- Data gathering, usage and quant analysis. Lorne said that while the supply and use of data, including alternative data, had exploded in the past few years (“how software is eating finance”), there was a possible looming regulatory problem. “When you can’t figure out why the machine is doing what it’s doing, how do the regulators handle it?”.
For instance, when the chess world started to pit machines against men it programmed the machines according to all the historically great game moves and allowed them to crunch through all the data to come up with their own moves. More lately, the machines have been given all the rules of chess and instructed only ‘to win’. The result has been more dramatically in the machines’ favour. “But what about when machine learning takes place in securities trading, where the rules are not always as clear, and we tell the machine only ‘make money’?”
- The development of alternative credit, which grew when the banks began to withdraw from the market during and after the global financial crisis. “But the banks have been active in trying to limit the competition,” Lorne said. “They now say we (fund managers) should be regulated in a similar way to the banks.”
- Passive versus active: variations on a very old theme. “I think that the worry that a lot of people had about the future of active hedge funds has subsided,” Lorne said. “The evolution of passive investing has provided opportunities for all of us.”
- ESG, for both corporations and investors – it’s about to get a lot more complex. “You have to believe in it, whether or not you conclude that it makes sense on a pure financial analysis… Even if you don’t believe a stock’s sensitivity to earnings is impacted by ESG matters, if a significant share of the market cares about it then it has to play a part in your investment decisions.”
Lorne pointed to the increasingly complex nature of ESG’s growing importance for funds and managers. You could not be “ESG compliant”, for instance, because there was no consensus on the definitions and no proper benchmark. As an example, whether nuclear-generated energy is good or bad is an open debate. The French, who point out how clean and efficient it is (and who also sell nuclear-generated energy in Europe), say it’s good. The Germans take the opposite view and say it’s bad on social grounds because it can potentially kill a lot of people when something goes wrong.
As another example: if an investor buys shares in a fossil-fuel energy company at six times earnings and at the same time buys an alternative energy-producing stock at 12 times earnings he or she is “plugging into shareholder value”. Lorne said that ESG proponents, though, tended to say you shouldn’t buy fossil fuel companies at all.
- Political uncertainty overriding economic analysis. “There are now so many places around the world where political uncertainties have become more important [for investors] than economic analysis,” Lorne said.