The Future of Alternative Investments: Embracing Technological Disruption

Alternative investments are sometimes defined as financial assets that fall outside the conventional categories of stocks, bonds, and cash. However, alternative investments also include unconventional styles or methods of investing. An alternative investment portfolio will often hold conventional stocks, bonds, and cash, but use an unconventional approach to doing so.

Nonetheless, whatever the asset or strategy, it all requires information – and lots of it. There are some 44'000 listed companies in the world. If a strategy focuses on private markets, there are an estimated 334 million unlisted companies from which to choose. As for real estate, arguably the largest alternative asset, one estimate puts the total number of buildings in the world at more than 100 billion.

It’s not surprising, therefore, that investment managers, both traditional and alternative, are continuously looking for new and better ways to find, organize, and analyze all the information needed for sound decision-making.

Over the years, technology has proven to be as disruptive for multiple industries; investors who quickly learn to harness its power have, time and time again, shown that it can enable and enhance their processes and results.

Technology as an Enabler to Almost Anything: Pre-20th Century

Perhaps the first modern technology to be used to disrupt the investment landscape was the electric telegraph, as developed in the 1830s by the American inventor Samuel Morse. Quickly, the telegraph became the standard means of transmitting news and information, including stock and commodities market prices, around the world, leading directly to the foundation of the Associated Press and Reuters news agencies in the 1840s.

Antique Telegraph Machine with Coded Keyboard
Source: Adobe Stock

In the last quarter of the 19th century, the telephone provided a new means of sending and receiving information. In conjunction with the telegraph, on which the legendary ticker-tape relied for stock prices, it was to be the principal technology for accessing investment news and securities prices until the 1930s. By then, almost every business with any interest in market prices had a ticker machine.

Stock Ticker Tape Machine
Source: The Secret Batcave Mastodon

20th Century – Electronics Arrival

The 1930s was also the decade in which electronics first made an impact on the dissemination of market news and prices. In 1929, Teleregister Corporation installed the first electronic stock-price board in a brokerage office. It displayed not just the latest price for any stock on virtually any American exchange, but also the previous day’s close and the current day’s high and low. By the mid-1960s, over 650 brokers’ offices had them installed.

In 1960, Scantlin Electronics, known since 1955 for its boards that were cheaper and easier to use than Teleregister’s, launched the Quotron 1 desktop terminal. When users keyed in the ticker code of the stock for which they wanted the latest price, the terminal retrieved it from the tape and printed it out. By putting real-time price information at the fingertips of every user, it became a huge success, with no fewer than 2,500 units installed within little more than a year.

Unsurprisingly, this success was met with almost immediate competition. In 1961, Ultronic Systems Corporation produced a terminal that, for the first time, used computer memory to deliver not just the latest price, but also the day’s high and low and the total volume traded. Very quickly, 10,000 units were installed around the world.

Quotron 1 terminal
Source: Cloudflare

The Foundations of Automation – NASDAQ Creation

So far, we have seen how technology enhanced and assisted securities trading. In 1971, however, its potential to disrupt and automate became apparent for the first time.

In 1971, the National Association of Securities Dealers (NASD) founded its Automated Quotations marketplace for trading stock (NASDAQ) – the world’s first fully automated securities market with no physical trading floor, all trades were conducted electronically. Today, it is the world’s second-largest stock exchange and home to some of the most revered names in technology, such as Apple, Meta, Microsoft, and Amazon.

Following that example, the “open outcry” trading of securities on physical trading floors has almost disappeared. However, large exchanges such as the New York Stock Exchange, the Chicago Mercantile Exchange, and the Bombay Stock Exchange still retain the old system for large or complex orders in less-liquid contracts, where experience, understanding of the market, and relationships can make a big difference.

Traders work on the floor of the London Metal Exchange
Source: Reuters

Yet another foundation stone was laid for the automation of investing in 1974 when the Commodity Futures Trading Commission first defined and regulated commodity trading advisors (CTAs). CTAs trade in commodity futures, a type of derivative security. These are significant for commodity investing, generally considered a part of alternative investing, for two reasons.

First, they are claimed to be one of the largest and most liquid markets in the world, after Forex. That’s why they are widely used by all kinds of alternative managers, not just CTAs, in order to hedge portfolios against loss quickly and easily.

The second reason is, however, more salient to our topic of “embracing technological disruption.” As commodity futures are both highly liquid and all of the same underlying structure, they lend themselves readily to systematic investing. “Systematic” in this context means a rules-based approach to investment decision-making.

Formally, systematic investing has a 300-year history. In practice, however, it dates back to whenever an investor first decided to invest only in specific assets under specific conditions – in other words, using a system of rules.

CTAs were the first alternative investment managers to adopt rules-based strategies in the mid-1970s. Initially, they did not all use computer programs, but appropriate algorithms were developed and gained ground quickly. Not only were the homogeneity and liquidity of futures markets helpful in that regard, but the lack of any need for asset allocation made the process relatively simple.

Assets under management of US active vs. passive funds (in USD billion)
Source: Morningstar

Accordingly, investors rushed into cheap “passive” funds. In 2023, assets under passive management surpassed their active competitors for the first time and still continue to gain market share. It is a revolution in which technology has played a crucial role. The key to passive investing is minimizing “tracking error.” An index is a theoretical construct, taking no account of transaction costs, the timing of trading sessions, or any of the other constraints associated with the physical buying and selling of securities.

To ensure that a passive or “tracker” fund mirrors the returns of its index precisely, its composition has to be adjusted timely and frequently to account for those costs and constraints, as well as the changing composition of the index itself. That requires specialist software because manual adjustment takes too long and is too expensive.

Cutting Costs, Saving Time

The disruption caused by passive investing did not stop there. Similar technology lay behind the creation of exchange-traded funds (ETFs) in Canada in 1990 and these cheap and liquid vehicles have also boomed. The chart below tracks their growth along with that of ETPs (exchange-traded products, which exclude fund structures).

Growth of ETFs and ETPs in assets under management (in USD billion)
Source: IPE

The relationship between technology and every kind of investment management has, therefore, taken a fundamental – and disruptive – turn over the last five decades. Developments that had previously favored fund managers by easing the workload and cost of portfolio management now favored the industry’s clients in terms of choice of products, expense, and ease of access.

Artificial Intelligence – Benefits for Private Markets

In November 2022, the next step was the advance of artificial intelligence (AI) and the launch of ChatGPT, a ‘chatbot’ that can mimic human conversation, perform sophisticated search functions, and compose text. ChatGPT has been widely adopted by fund managers for investment research, writing client and other reports, and doing similar kinds of low-priority tasks. Not a very glamorous role, perhaps, but essential – and performed at a much lower cost and with much greater speed than before.

Investment managers in private markets have been less broadly affected by the technological advances that we have outlined, most of which are related to listed securities. However, the use of AI for research has proliferated, especially for the mining of big data. In the past, this level of research would have required so many analysts as to be impractical, if not actually impossible. Today an exercise in, for example, measuring likely future demand for a real estate development, for a new technology, or for almost any new product or service, can be executed in minutes via ChatGPT and other AI tools.

Moreover, as with any kind of manager, those same tools are used to accelerate the composition of reports, to engage more effectively with clients and prospects, and to reduce overall costs. From all of this, it might seem obvious to conclude that, in the not-too-distant future, the entire process of both traditional and alternative investment management – asset allocation, securities selection, portfolio maintenance, client service, and everything else – will be automated end-to-end.

Moonshot is far from convinced about that. In particular, we are mindful of two pieces of investing wisdom. The first is a warning that stock markets tend to do whatever is necessary to prove the greatest number of players wrong. The second is appended to the promotional materials of every regulated – and many unregulated – investment product: past performance is no guarantee of future results. Nobody can predict the future. Every investment algorithm, every research discipline, and every analyst can only extrapolate from the past.

These considerations have been a major factor in Moonshot’s development of its investor-friendly access to the most promising opportunities in private markets and real estate. Normally, these opportunities are inaccessible to all but the largest investors with enough wealth to afford the substantial minimum commitments demanded. While those can range down to CHF 100’000 or so, the best require an investment of a more typical CHF 1’000’000 – or even a multiple of that. At Moonshot, you can get access starting from as little as CHF 25’000 without compromising quality, choice, or service.

Stop fretting that this new world of artificial intelligence and alternative assets is out of your reach – start your journey now.