The skills you need to succeed in alternative investments are changing. Here's how to adapt
The buy-side, particularly private equity, hedge funds and other alternative investment firms, remains an attractive and highly competitive part of the financial sector for many.
It’s easy to see why – generous compensation, great benefits, frequent travel and access to some of the smartest minds in the world.
But like any maturing industry, the alternative investment management industry has experienced several seismic changes over the years. Here are just a few:
“Mutualization” a.k.a. retail alts: Alternatives were once limited to only the wealthiest investors, but as the industry has grown, it has attracted the attention of a broad range of investors, from the largest institutional investors to the smallest retail investors. This has led to an explosion in the types of products offered to investors, highlighted by the recent proliferation of liquid alternative funds with lower fees and without high minimum investments.
Competition: Hedge funds and other alternatives were known for producing sky-high returns on a regular basis. But as the industry has become more crowded, the message is now less about performance and more about volatility and risk management.
Diversification: As global markets have become more correlated, investors are increasingly drawn to alternatives for their ability to diversify a portfolio. Because of this, much of the industry’s growth is coming from asset classes that are less correlated to the equity or bond markets, such as real estate, infrastructure and real assets.
The combination of these trends is driving changes throughout the industry. It’s not enough for financial professionals to be able to read a balance sheet or understand how to build a Black-Scholes model – they need an entirely new skill-set.
What skills will the industry require in the future?
Today’s economic environment will require you to analyze markets from a much wider lens. Increasingly, we see market activity driven by political decisions – particularly monetary policy and central bank policy – rather than fundamentals. This means that investment professionals need to be familiar with disciplines like psychology and physics, in addition to traditional economics, to accurately forecast market movements.
Improving technology is also forcing many employees to adapt.
On the trading desk, computer algorithms can perform complex calculations in a fraction of the time it would take a human trader. Some algorithms, like those increasingly being used at quant funds, are also better at making investment decisions. Within this new world, investment professionals need to provide a value-add beyond what robots and computers can easily do.
For example, the rise of big data across all parts of the investment function has led to a shortage of people who know how to properly analyze data. While artificial intelligence (AI) and machine learning systems can perform some of the analysis, there’s still no replacement for a human who can make sense of everything.
Lastly, as the alternatives industry becomes more public-facing, workers will need to be able to communicate with investors, regulators and the media. This requires strong personal and relationship-building skills, especially in times of crisis.
With so many funds offering similar strategies, any firm that does not have an advanced workforce will be left on the chopping block.
How can you develop these skills?
Younger workers can join networking events, take outside classes and find mentors to help guide them throughout their career.
More senior workers can bring in consultants or coaches, sometimes as a resource for the entire firm, to provide third-party advice about how to improve operations.
Work rotations, where employees are given the opportunity to learn about different aspects of the business, are another valuable skill-building tool.
For students and recent graduates, taking non-finance classes can provide exposure to other topics relevant to the industry. A background in psychology may improve a trader’s ability to predict market behavior, just as experience with environmental science may help a research analyst understand the long-term consequences of climate change. Well-rounded candidates will likely be more attractive to employers than those with a narrower skill set.
The alternatives industry is a magnet for talent from all over the world and across all disciplines. As the industry continues to mature, financial professionals should consider what skills they will need to succeed in 2017 and beyond.
Amin Rajan is the CEO of CREATE-Research and co-chair of the editorial committee for the Cayman Alternative Investment Summit (CAIS).
Photo credit: aluxum/GettyImages