The Next Wave of Investment Fund Innovation

As first seen on funds-europe.com

Investment fund innovation can be anchored by three super-trends, but don’t underestimate the importance of data as a key enabler in the bigger equation.

The investment fund landscape is no stranger to innovation. Many years of creative progress and rigour have consistently delivered value to meet the needs of the institutional and wealth investor communities. For example, look at the growth and evolution of the exchange traded fund (ETF) space with upwards of 24% annual growth over the last decade, more diversified and increasingly tailored ETF solutions, and the rise of “active” (actively managed) ETF products. The private markets domain has also been progressive, increasing in popularity with growth at twice that of public markets. We’ve seen private assets tokenised and distributed into secondary markets to democratise access to private asset funds and products, but what’s in store for the next stage of that evolution?

One thing is for sure, there are now more tools in the kit and more capable players and partners in the financial services ecosystem than ever. These can serve to inspire and enable new forms of innovation that simply couldn’t have been contemplated only a handful of years ago. The advent and relative ascent of tokenisation, fractionalisation and smart contracts have opened up and catalysed a universe of opportunities, delivering innovative products and solutions that meet the needs of an increasingly complex investor base.

There can be opportunities found in a multitude of areas along the funds value chain, as well as more laterally across what we increasingly talk about as ecosystems. One thing not for debate, is that maintaining status quo is no longer enough. Investors are under perpetual pressure to deliver on scale, alpha and performance in undeniably complex macro environments. Geopolitical factors alone create a challenging backdrop for delivering sustainable returns and effectively managing and pricing risk.

One element we must recognise as a critical anchor in respect of these key pillars is data. Data is everywhere and everything – whether contemplating as individuals, firms or funds. The way in which we read, store, mobilise and manage data will serve as the bedrock of success in innovating and delivering solutions. Additionally, the processing power required to deal with associated data models and connectivity across digital ecosystems will also be crucial to this effort. It remains to be seen how quickly the institutional community can and will move in more creative directions, such as harnessing new processing power, deploying blockchain based functionality and integrating artificial intelligence (AI) to deliver improved fund servicing outcomes or fund competitiveness in the market.

If we consider the investment fund landscape as a horizontal, there are vertical pillars that exist now as super-trends which can serve as core levers (or components) in the next wave of evolution. Here’s why:

1. ESG and SUSTAINABILITY – The ESG landscape provides a compelling storyline laden with complexity, risk and cost but also potentially untapped opportunities. Asset managers and investors alike are positioning and executing on fund strategies to pursue corporate net-zero goals and energy transition impacts. The many moving parts in this domain are driving the need for greater clarity, alignment and integration of ESG objectives into the investment activities of funds. Regulatory drivers are demanding greater attention to ESG as the landscape matures, with regulations like the Sustainable Finance Disclosure Regulation (SFDR). New rules expected in early 2025 will focus on areas such as fund product labelling, disclosure requirements and reporting obligations across a variety of jurisdictions. A combination of factors such as the need for more granular data, agility in rebalancing portfolios and increasing demand for purpose-driven strategies can help shape a new wave of innovative sustainability linked products. The key to success here could lie in the ability to procure reliable high quality ESG data, and effectively integrate this into new fund products and ecosystems.

2. TOKENISATION – Tokenisation is a little more nascent but by no means new. The blockchain based ability to digitise, fractionalise and leverage smart-contracts and their inbuilt programmability to drive benefits through the funds value chain continues to show promise and potentially high levels of disruption to pockets of the traditional investment fund proposition. The early opportunities and progress have been predominantly focused on the asset level; however, progress has also been made at the fund and fund unit level. This has unlocked a range of efficiency plays, such as removing friction in workflow management and enabling greater automation in execution and fund servicing, particularly in lifecycle event management.

Tokenisation can allow for more agility in fund structures and with that the ability to provide more customised portfolios at a scale that can be both manageable and commercial. For example, mobilising funds to unlock new liquidity for use as collateral in the case of money market funds (MMF) can enhance capital efficiency and has gained momentum in the last year. We must also consider the possibilities afforded by concurrent tokenisation of money whether in a stablecoin form, deposits or central bank digital currencies (CBDC). The friction and drag reduced on the flow of funds from this could present a compelling case for investment funds

3. ARTIFICIAL INTELLIGENCE (AI) – Aspects of AI and machine learning (ML) have been around for years, but the recent rise of generative AI and the deployment of large language models (LLMs) have brought about a remarkable step change. There are some very powerful tools available with immense processing power that can handle vast amounts of data, potentially delivering significant business value and driving transformational change across fund management and servicing. This has been demonstrated in the industry in areas such as onboarding automation, investment insights or client communication solutions to aspects of capital allocation, optimisation and trading based on market movement or predictive factors.

The potential of AI hasn’t gone unnoticed with a 2024 survey from Mercer reporting that 91% of fund managers are currently or are planning to use AI within their investment strategy or asset class research. Whilst there is potential to enable scale and efficiencies across the business, governance will be paramount in ensuring transparency and explainability.

The beauty of innovation and development of new ecosystems

These super-trend pillars are not the only areas which will provide avenues to innovate in the investment fund space. In this tech-first era, the opportunity to innovate is greater than ever. With a vibrant fintech scene, a cohort of firms with deep expertise and a strong focus on solving problems, strategic opportunities will emerge to buy and partner with fintechs who share common goals for the accelerated delivery of innovative products. The investment fund space is composed of large sectors across public and private territory, meaning there is no shortage of capital deployed in markets as well as in “dry power” on the sidelines waiting for the right time and opportunity. In such a competitive space for managers, finding the next differentiator in product and delivery could mean the difference between surviving and thriving in the next chapter of our industry.

Might we see a challenge to traditional fund structures and master-feeder type models? The creation of new nimble and tailored strategies will likely give rise to products and solutions that leverage blockchain network reach and smart contract programmability. Firms are then able to cultivate and participate in new ecosystems, deploying their tools to dial up and down on governance and automation to achieve optimised business outcomes. These outcomes could be in the form of scale and effectiveness in distribution, workflow efficiencies born from removing cost or friction to optimize functional and operational activity.

The next chapter

A key feature of the next chapter in innovation will be moving beyond the hype to create value for partners and customers. How a firm defines its value proposition and strategic goals will shape its innovation journey. From an investor, asset owner or manager lens, a retained focus on these super-trends will be key; and how they execute will likely determine whether they can deliver on aspects of mass-customisation, access to new markets, insights and data or the mobilising of assets in new ways to create liquidity and returns.

At the core of innovation, there must exist a willingness to embrace change and challenge convention, combined with a commitment to ideation and the pursuit of turning those ideas into reality. The beauty here is that many firms are pushing the boundaries of current operating models and norms, to cultivate progress for our industry. The reality is that operating in silos is often no longer optimal and so breaking ground with likeminded collaborators can be a powerful tool in achieving goals.