Tag:mutual funds

The Future of Active Funds Part 1: Will Blockchain Save Actively Managed Mutual Funds?
Blockchain 101 for Asset Managers

The Future of Active Funds Part 1: Will Blockchain Save Actively Managed Mutual Funds?

By Tyler Kirk

With the rise of passive products in the mutual fund industry, active managers have suffered staggering outflows. On July 9, 2016, Barron’s published an article titled, The Future of Mutual Funds, addressing what Morningstar calls, “Flowmegeddon.” According to Barron’s, investors withdrew US$308B from actively managed mutual funds and invested US$375B into low-cost passive mutual funds and ETFs for the 12 month period ending in May 2016. Focusing on active shops during that same period, the median outflow of the 10 best performers was US$598M and the same for the bottom 10 shops was US$3.8B. Thus, performance alone will not save actively managed funds, costs need to be cut.

On December 13, 2016, the Wall Street Journal reported that 60 mutual fund executives met inside OppenheimerFunds’ Manhattan office to discuss outflows from active shops. Named the “Seismic Shift Senior Leadership Forum, one of the proposed solutions was to reduce fees. Could blockchain be the answer?

In an October 21, 2016 article, Ignites Europe reported that service provider International Financial Data Services (“IFDS”) had carried out a test where mutual fund shares were bought using its mobile application. The transaction was processed, recorded on the blockchain, and added to IFDS’s registry. According to IFDS, mutual funds could cut costs by as much as $100M by distributing shares directly to investors through the blockchain. IFDS could bring its blockchain to market as soon as 2017.

Additionally, blockchain can be used for back-office processes as well as the recording of transactions for compliance and regulatory purposes. Combining blockchain with smart contracts may introduce efficiencies in the sec-lending and repo markets for funds.

Yet, there are regulatory and operational risks. How would funds meet recordkeeping and custody rules? Would no-action or exemptive order relief be required from regulators? Further, cybersecurity and protecting PII will have to be paramount. Nevertheless, in spite of the risks, active shops that implement blockchain operations correctly are likely to see significant first-mover advantages, and they just might discover the right combination of performance and cost savings.

Blockchain 101 for Asset Managers

By C. Todd Gibson and Tyler Kirk

Over the last two years, it has been difficult to attend any asset management-related event or seminar without hearing the term “FinTech,” and in particular, “robo-advice” and “blockchain.” What is apparent, though, is that many industry participants have little understanding of what blockchain technology is and how it works. This understanding is important in order to identify creative ways of leveraging this technology to increase efficiency.

In the October 2016 edition of The Investment Lawyer, K&L Gates partner Todd Gibson and associate Tyler Kirk published an article intended to give those with a limited understanding of blockchain a baseline of knowledge and to provide an update on current trends with respect to the use of blockchain by fund managers and their service providers. In case you missed it, the full article can be found here.

Copyright © 2024, K&L Gates LLP. All Rights Reserved.