Particularly at a time of record low bond yields and inflated stock and real estate asset prices, institutional investors are struggling to generate returns. It is not an exaggeration to say that many pension funds and insurance firms face an existential crisis.
Asset managers are also facing a perfect storm of poor returns, rising correlated risks, new regulations and challenges to their business models from fin-tech upstarts.
Less than 1% of asset managers have been able to generate alpha and investment horizons are shrinking, with many facing career risk with just over a year and a half of underperformance.
Well-recognized behavioural biases such as framing, myopia, anchoring and loss aversion amplifies herding behaviour to the point that nearly 80% of all institutional investor money is invested hugging the indices closely. Status quo bias or endowment effects, as well as groupthink endemic to many investment committees increase the risks of counter-productive and risk-on, risk-off behaviours in the market.
By recognising these biases and designing investment mechanisms and processes to counter them, investors and asset managers can distinguish themselves from the crowd, avoiding the costs of crowded trade and earn real alpha by countering groupthink. Those who do so will survive the perfect storm that is about to hit institutional investors and asset managers.