Afew months ago, I climbed into yet another Chicago taxi. The driver immediately expressed displeasure that I was not going
very far. The interior of the car was filthy; the driver spoke loudly to
someone on his headset, with the radio blaring in the background. His
understanding of Chicago’s streets was marginal. And, upon arriving
at my destination, he informed me the credit card reader was broken.
I exited vowing to avoid taxis in the future.
Then I found Uber. An app-based ride-sharing service, Uber
provides the same services as a traditional taxi for about the same
price—but with a high degree of customer satisfaction. It’s a business
that successfully took on an entrenched, monopolistic area populated
with dissatisfied customers and offered a viable, prudent alternative,
effectively disrupting the conventional taxi business. It gave riders a
We see this same disruptive experience globally: Many of the
institutions that have served us well for decades have come to the
end of their lifecycle. Kodak, which at its height employed more than
140,000 people and was worth $28 billion, is bankrupt. The new face
of digital photography is Instagram, which employed only 13 people
when Facebook bought it for $1 billion in 2012.
This leads me to ask: Why has our industry—beneficial
investing—not experienced such a disruption?
Our general business model today is basically the same as it was
in 1970, when the first independent asset managers began to appear:
An asset owner hires an asset manager to perform a specific assignment (even today’s strategic partnerships specify an assignment) and
pays a fee for the service rendered.
This business model, like the taxicab model, is anachronistic,
monopolistic (it requires its own type of “medallion”), and generally
disappointing for asset owners. It’s time-consuming, expensive, laden
with misaligned interests, and managers often fail to consistently
deliver their promised target returns.
Asset management operates on traditional incentives—salary,
bonuses, and equity—with overspecialized employees trained in
groupthink (think CFA here) assigned to clearly delineated roles and
tasks. Risk-taking and failure are discouraged. Asset-raising often
trumps investment excellence. And business models—across firms—
are incredibly insular. This model is so stultifying that I would argue
that there has not been an idea that has fundamentally reshaped how
we invest in the past 20 years. What passes for innovation is merely
So I went back to my Uber experience. Thinking it over, I saw
that asset managers’ hegemony exists because we believe that asset
managers are the sole source of the intellectual capital and processes
that give rise to the strategies investors seek.
But what if we look elsewhere for this intellectual capital? Let’s do
asset management without asset managers. Here are three disruptive
Strategic partnerships between asset owners —formal cooperative relationships between peers that seek to create shared value through
combined risk, funding, and resource contribution. Success is not a
given, but neither is it a given in an asset manager/asset owner strategic
partnership. The benefits of this approach are transcendent (genuine
alignment of interests, direct accountability, economies of scale, lower
costs, direct knowledge-sharing) and the barriers manageable (
governance, operations, administration).
Crowdsourcing where an asset owner distributes its investment
problem via a web-based platform to an unknown, diverse audience in
the form of an open call for solutions. A cash prize could be offered for
the best solution (after it is proven viable), which the asset owner would
own. Academic literature supports the efficacy of this approach, and
the empirical evidence shows this method has worked well in other
quantitative disciplines. The obvious—and provincial—objections
(IP rights, the composition and size of the group of solvers, implementation of the winning idea) are all tractable.
Finally, asset owners could ask Google X, the super-secret innovation lab
dedicated to finding “moonshots,” to help build an investment strategy. Why?
Because its mission is the investigation of audacious innovations that
have a slim chance of succeeding—but might revolutionize the world
if they do. Its culture is unencumbered by our industry’s biases and
fully committed to innovation. And Google X has the necessary
resources to create viable investment solutions: superior financial
strength, massive technological capabilities, and polymaths.
We are at a point in time where more of the same creates more
problems than it solves. A problem cannot be solved by the same logic
that created it, so we need to explore dangerous ideas that dislodge us
from our sclerotic mindset.
WITHOUT ASSET MANAGERS
Angelo A. Calvello, PhD, is CEO of Impact Investment Partners
LLC, the wholly owned affiliate of Impact Investment Partners
AG. He is responsible for developing and marketing alpha-centric
You’re either the disrupter or the disrupted... but you can no longer be in denial.
–Avi Reichental, Chief Executive Officer, 3D Systems
THE DOCTOR IS IN