The following document is an approximate, but not exact, transcript of the Operational Leaders podcast conversation between host Terrance J. O’Malley and guest Jack Inglis.

Please support the production of this podcast by downloading the Jack Inglis episode.

Narrator 0:05
Welcome to the Operational Leaders podcast featuring leaders and innovators in the investment management industry, where we discuss the business of running the business with host and top industry executive Terrance J. O’Malley.

Terrance O’Malley 0:19
My next guest is the chief executive officer of the Alternative Investment Management Association or AIMA, the global representative of the alternative investment industry with around 2000 corporate members in over 60 countries. He has over 30 years of experience in the financial services industry, including the hedge fund business. Prior to joining AIMA, he held senior management positions at both Morgan Stanley and Barclays. Please welcome Jack Inglis.

Jack Inglis 0:45
Thank you.

Terrance O’Malley 0:46
Jack, it’s great to have you here today. Can you give us a quick intro into AIMA?

Jack Inglis 0:51
Ah yes! We’re 30 years old this year, which is quite a milestone for us. From very humble beginnings with just a few members, we’ve grown into really what I think is the global representative of the hedge fund industry. And as you said, with over 2000 members these days.

And so what is a trade association? They are member organizations and hopefully achieving for the industry, in a mutual way, things that are a little bit more difficult to achieve singly. And by that, I mean, we offer advocacy, communication, education. But if I think I was going to sum it up in sort of one sentence, what do people get out of being a member? And one of the questions I get asked most often by members is: “What are other people doing when they’re faced with a particular challenge?” So people like to learn from their peer group, and I think this is what a trade association enables them to do – strength in numbers.

Terrance O’Malley 1:46
So you have 2000 members. When you say members, do you mean firms?

Jack Inglis 1:47
I mean firms. Yes.

Terrance O’Malley 1:47
And then typically at a firm, who is the person that you would deal with?

Jack Inglis 1:48
The two principal functions that I think we offer most services to are people in legal and compliance functions, whether that be the Chief Compliance Officer, the GC . . . but also on the operations, the Chief Operating Officer I think, is a key stakeholder for what we can provide.

Terrance O’Malley 2:04
And how do you engage with what is typically the owners – the portfolio managers?

Jack Inglis 2:09
Portfolio managers like to spend all of their time looking at markets and, making investment decisions. So typically, we wouldn’t spend a lot of time engaging with them. Although obviously at the startup situation where the owner is taking a huge interest in all aspects of his business, we will engage with them at a very early stage of their business setup.

Terrance O’Malley 2:28
So you mentioned or I mentioned that you had been at Morgan Stanley, Barclays, you had an illustrious career in the financial services industry. How did you end up AIMA?

Jack Inglis 2:37
Yeah, well, I think I was one of the first people at Morgan Stanley who ever did business with hedge funds, when it was completely unfashionable to have that as a client base, and that’s really back in about 1990. I then moved into the prime brokerage business, which is obviously a lot of connection with the hedge fund business, became a hedge fund manager myself when I became chief executive of a hedge fund firm based in London. So really, my whole career – or a large part of my career – I’m involved with hedge funds. And I ended up at AIMA because I picked up the phone one day and took the call. And it was at a particular time when I was looking for new and interesting challenges. And this has certainly brought it.

Terrance O’Malley 3:13
What year was that?

Jack Inglis 3:14
I joined AIMA in 2014. So I’ve been with the organization now for just over six years.

Terrance O’Malley 3:20
Any significant changes at the organization since then?

Jack Inglis 3:24
We’ve grown quite substantially both in terms of numbers of members, numbers of staff, and number of activities that we put on. But I think probably there are two real sort of strategic initiatives that we’ve been acting on. We’ve been first furthering our presence here in the United States and growing our membership, and that’s had very healthy returns for us. But the other initiative really has been growing into our name. AIMA stands for the Alternative Investment Management Association. We’d always historically been there to support the hedge fund industry. But growing further into alternatives, as we’ve seen more crossover, we’ve established a service to be there for the alternative credit industry, which has been very rapidly growing. So beyond hedge funds and further growing into our name is what we’ve been doing,

Terrance O’Malley 4:08
Do you see growth beyond hedge funds and credit and into private equity?

Jack Inglis 4:11
I think what we’ve been seeing in just recent years has been explosive growth in private assets, private asset investing. So whether that be private equity, whether that be private credit, whether it be infrastructure, that’s where institutional dollars have been flowing very substantially over the past few years, somewhat to the expense of the hedge fund industry, I would say. And I think that’s set to continue, certainly over the foreseeable future in the next one or two years.

Terrance O’Malley 4:34
Jack, we talked a little bit about what alternatives are and where you’re seeing AIMA go with that. Talk a little bit more broadly about how you see the alternative industry changing.

Jack Inglis 4:44
So alternative, it’s a name which seems to have stuck and what does alternatives actually mean? It’s called an alternative because it’s alternative to traditional forms of asset management. But very much I think it’s become a mainstream investment choice for investors, particularly institutional investors. And that’s where the big change has gone on in the past 10 plus years. From having been an industry which has been supported by wealthy individuals as investors, institutional investors have come in, in large swathes across the whole alternative spectrum. And that’s really been the big significant change.

Terrance O’Malley 5:18
So Jack, we talked about alternatives, what is alternative? What does that mean in terms of strategy, in terms of portfolio composition?

Jack Inglis 5:27
So, traditional asset management is historically been investing in bonds and stocks in the public markets. So the term “alternatives” is really just to reflect that it’s not that. It’s different and its alternative to that. It covers a wide variety of things. Within the hedge fund industry, even there, that’s not just one homogenous type of strategy that’s been investing. The hedge fund industry is extremely heterogeneous in the nature of its investment strategies. Added to that, you’ve got all the investments in the private markets – private equity, private credit – which are also within that alternatives description.

Terrance O’Malley 6:05
So if a strategy is alternative to something, does that [create] inherent capacity limits on any particular strategy?

Jack Inglis 6:12
I don’t think it does. I don’t think that it can only reach a certain percentage of portfolios. It’s been growing in recent years, in many places, you would find that it’s a 15% allocation from pension plans. In many places, it might be more and, in some places, less. But I don’t think it’s got capacity constraints. Just take the private markets at the moment. There are actually more companies in the private sector than ever before, and in fact, less public companies than ever before. So the opportunity set I think, is still there. And it’s not capacity constrained, although indeed there’s competition for deals in any way in investing. Within the hedge fund industry, the argument might go that there are too many hedge funds now, and that the opportunities are becoming thinner on the ground to exploit amongst hedge fund managers. But I don’t think that means it’s capacity constrained for those people who are able to exploit the opportunity and find those returns.

Terrance O’Malley 7:10
Is it hard to start up a fund today?

Jack Inglis 7:12
Indubitably, yes. The costs of setting up a fund these days are very substantial. But perhaps not as much as some people would say. I’ve often heard it said that unless you’ve got 250 million dollars of startup assets, then you’re not going to have a viable business model. But that doesn’t explain why there are so many hedge fund managers managing considerably less than 250 million. And when we did a survey about two years ago of what we would call “emerging managers,” we found that the breakeven was actually sub 100 million dollars, closer to $90 million from what the respondents were telling us. But nevertheless, the operational infrastructure that you need to put in place, the ability to build or raise assets, has never been more difficult than it is today. So it’s certainly not easy. But people with a pedigree who are able to attract investors, who’ve got a good proposition, they’re still starting up and they’re still doing well.

Terrance O’Malley 8:08
This may be a rhetorical question, but was it ever easier? Is there a tendency to look back and say, “Well, all these firms started back when. So it must have been easier then than now.”

Jack Inglis 8:17
Well, when I was a proprietary trader way back when in the 1990s. And I compare the opportunities that were available in the marketplace to exploit, it was a lot easier to produce returns in those days than it is now. There are more eyes looking at those opportunities. And those opportunities disappear very, very quickly if they exist. So I would say it was easier. It was easier to raise money. It was easier to produce returns. And yes, I’m looking at the past with fond memories compared to what it is now. But actually new people coming to the market, they perhaps don’t have that long memory, so they didn’t have that to compare. So it’s not putting people off starting up.

Terrance O’Malley 8:55
You started to talk earlier about pension funds, and the large allocators coming into this business. How does that impact the business?

Jack Inglis 9:04
The most important part I think of that is the need to have an absolutely excellent institutional type infrastructure, which is being demanded by those investors. Without that, and you’ll be found out through the operational due diligence process. Without that you’re not going to be able to raise any capital at all. So from being small operations from many, many years ago, being thought of as a cottage industry, the demands from institutional investors is such that you can’t do this without significant excellence on the operational side.

Terrance O’Malley 9:36
That suggests that it benefits firms that are established and have that infrastructure already in place. And maybe that gets back to these barriers to entry you referenced a minute ago.

Jack Inglis 9:46
It’s no doubt it comes with a cost. And so the larger you are, the more you’re able to absorb those costs. But having said that, the solutions that are available now to new firms setting up, who are not reliant on legacy systems, offers them some potential benefits and opportunities, here, to put in a best in class infrastructure from vendors and solutions that are provided by outsourcing some of these activities without having to change legacy systems. So I wouldn’t say that it’s a huge advantage just because you’ve been established for a long time. Yes, you’ve got the experience at it. Yes, you’ve got the resources to be able to spend on it. But there are routes that make setting up the operational infrastructure that much easier than it was, say, 20 years ago.

Terrance O’Malley 10:30
What do you think about the expectations in terms of returns? Are they realistic? Or do they vary by the investor type? Is it hard to make generalizations?

Jack Inglis 10:40
So that’s quite often one of my favorite topics. And particularly we as a trade association, we have to support the industry. And one of the things that really always irritates me is when I open up the newspaper and there’s comments about the hedge fund industry performance as it compares to the S&P. As though that’s the only measure of returns that hedge funds should be judged by. Do institutional investors look the same way? No, I think they’re a bit more sophisticated than just comparing with the S&P. But are return expectations too high? And I would say they historically have been. We now live in a world of close to zero interest rates and have done for many, many years. And that’s the risk-free rate. So all returns should be judged versus what that risk-free rate is. But return expectations haven’t come down as interest rates have come down.

And actually, if you look at it quite closely, what have been the returns of hedge funds as a premium to LIBOR, let’s say (where LIBOR is soon going to disappear), but to interest rates? The actual premium over interest rates has actually been fairly consistent over recent years, despite actual performance coming down. So I think it’s important to look at that. But it’s very possible that there are investors out there who still think that hedge funds should produce supersize returns and are therefore disappointed when they don’t. But I think that’s the wrong way of looking at it. And as I said earlier on, hedge funds are not homogenous. They offer many different types of strategies and many different types of risk and return profiles. And so therefore, you got to ask yourself, “What are you actually looking for from an investment in a hedge fund? Are you looking for superior returns to all markets? Are you looking for diversification?” But I think in the main expectations have been too high. And that is why many investors, when they’re surveyed annually, have been saying recently that their expectations have not being met.

I think there’s one other thing I would add to that, Tery, is that I think sometimes expectations are driven by need. The big gap that pension funds have enough funding at the moment requires them to see returns of seven or eight percent per annum. And therefore, it’s rather wishful thinking that all their investments should deliver that. And I think that’s what their expectations and their demands and their targets are from their investments in alternatives. without acknowledging the fact that interest rates have come right down.

Terrance O’Malley 13:04
In addition to performance and managing and setting expectations, what do you see as some of the bigger challenges that the industry is going to face over the next few years?

Jack Inglis 13:13
So aside from performance and meeting investor demands and expectations, the biggest challenge, and by far and away in the industry, is the margin compression that is going on. So costs have gone up, revenues are coming down. It’s a performance fee-based model. And if performance comes down, then so do the revenues at the manager come down. And all of that adds up to margin compression, which we don’t see any end of at the moment.

Added to that, or aligned with that, is really the operational complexity, which is really been brought on by investor demands. As I’ve said earlier on for operational excellence, the additional compliance burden that firms are now faced with, particularly since all the new regulations that have come into place since the financial crisis, all of these put an additional strain on the business model. And these are challenges that really all firms big and small are facing at the moment.

Terrance O’Malley 14:09
Is that unique to the alternative industry? Or is this asset management general?

Jack Inglis 14:13
We see that right across the asset management industry. At the moment. When I speak with my counterparts at associations who represent the more traditional investment managers, they would describe exactly the same problem. Margin compression is a very significant component of what people are grappling with at the moment

Terrance O’Malley 14:32
As firms respond to these trends. What do you see is the future of the operational side of the business?

Jack Inglis 14:39
The operational future really has to be one where efficiencies are achieved. Otherwise, the cost burden by throwing just more people at the complexity just adds to the challenge that managers are facing. So the future has to be one of finding the right solutions. A lot of those can be outsourced now, and I think there’s a lot of that going on. And then technology, technology doesn’t just help the investment process, but it should certainly help the operational processes. So I think that is the sort of the future that we’re going to see – finding ways of creating efficiencies, reducing costs within the operational side of the business, as they’re faced with this margin compression that I talked about.

Terrance O’Malley 15:20
Are we going to see headcount reduced in this industry overall?

Jack Inglis 15:24
I think gone is the day we just added more people to process what was needing processing within the firm. And as firms have grown, you’ve already seen their operational side has not grown in terms of number of people, because people are already adapting to the ability to be able to use technology for a lot of processes that were originally manual. Does that mean a big reduction in the headcount? Potentially. I think it changes the look of the headcount in terms of the sort of people that you’re going to be having and I think you need a mix of technology skills. But plus also skills right across the spectrum of risk, of risk management, and also scrutinizing, really all the procedures that you’re facing. You need them. You need perhaps different people, rather than just processers that you had in the past.

Terrance O’Malley 16:12
And I would expect some of those people are going to get absorbed by what we see as a growing trend of outsourcing.

Jack Inglis 16:17
Well, I think that’s right. Yes. You’re outsourcing and those out-sourcers also need people, as well as the technology, to help them. So there may be some movement of those people across that divide. And yes, I would expect to see that, and I think we already have been seeing that.

Terrance O’Malley 16:30
Do you have any advice for people who are on the operational side in terms of where they might look for their future and how they might be valued in the firm of the future?

Jack Inglis 16:38
They definitely need to stay up to date with everything that’s changing around them. The old ways of doing things are not the future way of doing things. And most specifically, are they being able to identify what technologies and what outsourced solutions are going to work for them. So being totally aware of that I think is extremely important. And [having] a huge understanding of risk, I think, is going to need to be demonstrated. So a really sort of holistic approach to all the operational risks that face a firm. I mean, I think what’s interesting at the moment, Tery, is the way that regulators are really focusing on operational resilience. And certainly in the UK, the regulator there, the FCA, sent out a “Dear CEO” letter in January of this year, saying that it was going to be a huge focus for them, not just at alternative firms, but at all asset management firms. What is the standard of their operational resilience?

Terrance O’Malley 17:33
I’m going to put in a plug for AIMA, because your association, some of the other associations, some great ad hoc organizations that sprung up organically, are a great way to stay on top of the industry. [They provide] great resources to know where things are changing and how to stay relevant, how to network, how to connect with your peers. AIMA is a great opportunity to do that.

A couple other things before we conclude. Lots going on in the industry right now. Coronavirus is here for the foreseeable future and is going to impact our lives. What are some of the things that AIMA is doing in response to that? What are some of the new initiatives at AIMA?

Jack Inglis 18:10
Yeah, that situation is evolving very rapidly, isn’t it? And I think one of the key things that we are really trying to do certainly around the coronavirus, and it is related to how firms plan themselves accordingly for potential of complete shutdown of their office space. A number of firms are taking different approaches. Really what we’re doing at the moment is trying to collate how firms are planning and share what best practices are at the moment. And actually, we’re learning ourselves as an organization, what we should do around travel, about working from home.

But I think one of the key things, if we’re all going to find ourselves in a prolonged period of non face-to-face interaction – and we’ve already canceled some events because of this – is finding new ways to connect with our members and allow our members to connect with each other. Because I think one of the important things about an association is that peer to peer learning that you get from being able to connect with your peer group right across the industry. So we’re going to be doing a lot more things like this, Tery. I’m going to learn how to put on podcasts. We already use webinars quite extensively and have done for many years, but we’ll be doing more of that. Because I think it’s important still, to connect with members for them to be able to feel engaged with us. And that’s what we’re going to be doing.

Terrance O’Malley 19:21
And people who want to check in with your organization, they can find you on the web at

Jack Inglis 19:22 There’s a wealth of material on there. It’s one of the things that we at AIMA have made a very key to our ability to be able to connect with members – whether those be our sound practice guides, whether those be our comment letters on new regulations coming out. There’s a wealth of material there for them to look at.

And I should just finish talking about the due diligence questionnaire, which is probably what AIMA is most famous for. And that is now modular, and it’s all accessible on the AIMA website. But you know, we talked a little bit earlier on about how the operational challenges, and how they’ve increased over the years. If I look back to the thinness of the AIMA due diligence questionnaire between investor and manager when we first produced it in the 1990s to really what it covers now, it’s a very different looking beast. And that’s going to continue to expand as investors further and deepen their due diligence on managers.

Terrance O’Malley 20:22
Jack, it has been great having you here today. Thank you for sharing your insights. Thank you for the good work that you and your colleagues at AIMA do. I appreciate you coming here today.

Jack Inglis 20:30
I’m glad to come today. Thank you.

Terrance O’Malley 20:31
Thank you.