The investment world stands on the brink of a revolution, driven by rapid technological advancements and shifting investor behaviors.

Fund managers and investors must adapt to seize emerging opportunities in this evolving landscape.

Core innovations shaping the future include AI integration and the rise of active ETFs, which are redefining capital allocation strategies.

These changes promise to enhance efficiency, access, and returns for all stakeholders.

AI and Technology: The New Backbone of Fund Management

Artificial intelligence is transforming wealth management from a concept into a practical tool.

Over two-thirds of firms now use generative AI, with half scaling it for operational benefits.

This adoption could lead to a productivity boost of 25% to 40%, revolutionizing tasks from strategy to compliance.

Human oversight remains essential, but AI's role is expanding rapidly.

• Generative AI saves approximately three hours per professional in client communications and research.
• Investment firms are moving AI from experiments to enterprise platforms for competitive advantages.
• AI is a high-conviction theme for portfolio construction, alongside diversification strategies.

Trends include increased fintech investment and heightened cybersecurity concerns.

Excess in the AI space may lead to creative destruction, but the potential is vast.

The Evolution of Active ETFs and Hybrid Products

Actively managed mutual funds face steady outflows, while ETFs show robust growth.

Active ETFs are gaining traction, with their share of US ETF net inflows rising significantly.

In Europe, active UCITS ETFs have seen an 80% increase in assets under management.

This shift reflects a blurring of lines between active and passive strategies.

• Active ETFs' share of US inflows rose from 1% in 2014 to 26% in 2024.
• Innovations like ETF share classes for mutual funds aim to stem outflows.
• Next-generation investors favor active ETFs over traditional approaches.

Fund structures are evolving, with a focus on flexibility and convergence.

Alternatives and Private Markets: A Growing Frontier

Global alternatives are projected to reach $32 trillion in assets under management within five years.

Private credit is expected to more than double, highlighting its importance in portfolios.

Growth in alternatives and private markets is accelerated by fewer public listings and longer private stays.

This trend favors alternatives over traditional 60/40 portfolios.

• Alternative funds could grow at over 50% CAGR to $4.1 trillion by the decade's end.
• Private credit attracts borrowers, investors, and regulators for diversification benefits.
• Retail access to alternatives is expanding through new fund structures.

The retailisation trend is making private markets more accessible to individual investors.

Regulatory and Access Innovations: Opening Doors

Regulatory shifts in the US are enabling broader access to alternative investments.

The DOL has rescinded guidance that discouraged alternatives in 401(k) plans.

Tokenization and digital assets are enhancing liquidity through fractional shares and 24/7 trading.

The GENIUS Act provides clarity for stablecoins, spurring growth in tokenized funds.

• SEC no longer limits closed-end funds to less than 15% private assets.
• Tokenized money market funds have launched post-GENIUS, with central banks testing use cases.
• Decreased regulatory intensity in the US is welcoming for fund managers.

These changes empower investors with more choices and flexibility.

Hedge Funds and Portfolio Strategies: Beyond 60/40

Hedge funds offer valuable diversification with lower volatility compared to equities.

The HFRI Index shows an annualized return of 9.12% since inception, demonstrating resilience.

Evolving portfolio strategies like moving beyond 60/40 are gaining traction in uncertain environments.

Income focus through EM debt and dividend stocks is becoming more prominent.

• Event-driven strategies benefit from rising capital markets activity.
• Discretionary macro funds perform well on policy divergence and geopolitics.
• Nimble portfolios are designed to own risk deliberately rather than indiscriminately.

Next-generation investors lean towards less traditional strategies for alpha generation.

Market and Economic Context: Navigating Uncertainty

Market conditions are marked by profit growth challenges and operational complexities.

New fund launches have declined amid tariff uncertainties and supply chain impacts.

Partnerships are rising, such as life insurers collaborating with alternative managers for private debt exposure.

ESG and sustainable finance remain ongoing trends in the industry.

• M&A activity in financial institutions groups is increasing.
• Firms are rethinking operating models to manage distribution complexity.
• Above-trend growth and easing policies favor selective risk-taking in portfolios.

This backdrop requires careful navigation for sustained success.

Practical Steps for Investors and Firms

Investors should focus on selective risk in a growth-oriented economic environment.

Diversification beyond AI and income via multi-asset strategies is recommended.

Firms must scale AI and rethink talent architectures to leverage regulatory openings.

Education on new products and partnerships is key to staying competitive.

• Attend webinars and partner with firms to understand emerging trends.
• Pursue partnerships to access new markets and technologies.
• Leverage tokenization for enhanced liquidity and access to private assets.

These actions can help stakeholders thrive in the evolving fund landscape.

The data underscores the transformative potential of these innovations.

Embracing change with agility can lead to sustainable growth and resilience.