I strongly feel, however, that this is not the time for a wholesale retreat into a passive investment strategy mindset, which could result from the rush to de-risk portfolios as the global wave of deleveraging has taken hold.

There are always cycles in the markets when it is easier or more difficult to produce alpha. Long term investment performance in general is a result of inefficiencies in the markets. Over the last few years it has been increasingly difficult to capture alpha because volatility had fallen to historically low levels, so hedge funds were taking market directional bets and repackaging beta (market performance) with leverage to reach their own fund target return hurdles.

I can completely understand the reaction of many organisations to the credit crisis who question the capabilities of managers in producing alpha at all, but I’m very optimistic that the coming period will reveal the truly skilled players operating within transparent and robust corporate governance structures.

There is a big change underway in the industry with the traditional and alternative investment management models converging. In the past, traditional investment managers have delivered reasonable returns simply on the back of strong trends in capital markets and buoyant equities. Managers now have to make a choice between whether they want to produce low margin passive products, or whether they can really convince their clients that they are able to produce alpha in a consistent way.

I believe the dislocation across financial markets stemming from the credit crisis is opening up huge opportunities for investors and managers -- who are less constrained than clients in operating across markets and geographies. The investment management industry will shrink and consolidate, though probably remain just as complex, and there will be fewer parties fishing in a bigger pond from an alpha perspective.

At ING Investment Management Europe we are re-engineering our organisation along skill based principles, to ensure we are in the top-tier of global managers actively producing alpha in the emerging new investment world.

We are in the process of creating a multi-boutique of relatively small entrepreneurial investment units targeted at a few strategies, such as emerging markets, where we believe we have a particularly strong global network. This breaks away from traditional investment “silos,” like fixed income and equities, to address the entire span of corporate capital structures.

The investment units will be supported by general functions including centralised dealing, business services and portfolio implementation.

We are also merging our research skills on the equity and credit sides to form a new corporate analytics model, which is much more holistic.

The excesses we’ve seen in compensation within financial companies have rightly hit the headlines worldwide. At ING Investment Management Europe we have always rewarded in a way that is aligned with the interests of the client by putting performance, and development of the investment strategy, at the heart of the compensation and bonus structure. Going forward we will put more emphasis on the long term and the consistency and sustainability of these results.

No radical overhaul of an investment management company in the current environment would be complete without close attention to its risk management processes. ING Investment Management Europe is building a proprietary risk model which is asset class and instrument agnostic.

By that I mean, we will look at every individual investment strategy and ask what are the different factors driving performance and its sensitivities from capital market and economic perspectives, as well as a range of other factors. We will then be able to get a full picture of how a strategy will behave in the future on the basis of very different scenarios.

The credit crisis has taught us that risk models have a strong tendency to rely on statistical and historical measures. The big problem in our industry has been that people have been putting on bets in their portfolios based on a very one-dimensional view of the risks they’ve been taking.


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*) Jan Straatman ist Chief Investment Officer bei ING Investment Management Europe.