What the Dodd-Frank Repeal Means for Alternatives
The Dodd-Frank financial overhaul law was enacted in 2010 after the financial crisis as a restraint on financial institutions that used an unregulated economy to maintain unsustainable growth. However, in its first wave of action in the White House, the Trump administration announced its plans to derail the Dodd-Frank regulatory system. In the President’s defense, White House National Economic Council Director Gary Cohn told the WSJ that “Americans are going to have better choices and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year.”
In reaction to this announcement, the financial sector, particularly bank stocks and financial ETFs, strengthened dramatically. Deregulations will cut costs for fund managers and open the door for new investment opportunities within unrestricted territory. Trump has served up a market ripe for fund managers with active investment strategies. By allowing investors to respond to ever-changing markets, active management empowers investors to maximize opportunities as conditions demand. Active investment strategies attempt to beat the market by setting performance to benchmarks that are higher than market indices. Passive investment strategies, such as a traditional index fund, may experience the benefits of a bull market, but do not have the capacity to take full advantage of a ripe economy. This is because passive investment strategies seek to match their portfolio construction as close as possible to market indices.
The debate between active and passive investment strategies is as old as the industry. However, never has deregulation been met with such powerful innovative technologies. Big data and AI give financial institutions the means to tap into an unrestricted economy and target exotic asset classes with precision. Active investment strategies with these technologies on their side can expect to outperform passive investments during a new era of economic growth. On the other hand, if you’re locked into an index fund, you could be exposed to significant downside due to single-sector performance. For example, during the collapse of the dot-com bubble in 2000, active management outperformed passive significantly.
The repeal of Dodd-Frank fortifies the views of the Global Head of BlackRock Alternative Investors, Mark McCombe, who recently stated that “the future of the hedge fund industry looks different than the past and the present.” The alternative investment industry will capitalize on a rising class of innovative active investment strategies, evolving into new form. According to Preqin, the alternatives industry is now expected to grow 8–10% annually. Private equity, real estate investment funds and art assets are big movers within the market. Notably for their exposure to affordable entry price assets. Technology and deregulations increase efficiency for these investments for individual and institutional investors alike. With nearly $1.4 trillion of dry powder waiting to be invested by pension fund managers, the deregulations in the financial sector will be incentive to start taking risks with committed capital. As an individual investor, the benefits of the market are easily and affordably captured. To start investing in alternatives today, e-mail concierge@arthena.com.
