Hong Kong Securities and Futures Commission (SFC) Chief Executive Ashley Alder: Fintech, Passive Investing, and the Rise of Private Capital Shape the Future of Finance

Hong Kong Securities and Futures Commission (SFC) Chief Executive Ashley Alder: Fintech, Passive Investing, and the Rise of Private Capital Shape the Future of FinanceAt a recent Dialogue with International Investors seminar, Ashley Alder, Chief Executive of the Hong Kong SFC, delved into the key forces reshaping investment markets. She highlighted fintech innovation, the continued dominance of passive investing, the burgeoning private capital market, and geopolitical uncertainties as shaping the complexity and challenges of the future financial landscape

Hong Kong Securities and Futures Commission (SFC) Chief Executive Ashley Alder: Fintech, Passive Investing, and the Rise of Private Capital Shape the Future of Finance

At a recent Dialogue with International Investors seminar, Ashley Alder, Chief Executive of the Hong Kong SFC, delved into the key forces reshaping investment markets. She highlighted fintech innovation, the continued dominance of passive investing, the burgeoning private capital market, and geopolitical uncertainties as shaping the complexity and challenges of the future financial landscape.

I. Fintech: Leading Finance into Blue Oceans

Alder emphasized fintech's crucial role in driving financial industry transformation. She noted that algorithmic trading, machine learning, and AI language models are profoundly altering all aspects of finance, from front-office sales and research to mid-office operations management and back-office compliance and risk management, presenting unprecedented challenges and opportunities.

Specifically, innovative technologies are reshaping every stage of financial services. High-frequency algorithmic trading strategies have become a mainstream market practice, significantly increasing trading efficiency and speed, but also posing challenges to market stability. Machine learning enhances risk management's intelligence and precision, helping institutions better identify and mitigate risks. AI language models offer new possibilities for customer service, data analysis, and research report writing, boosting efficiency.

Furthermore, tokenization, as an emerging technology, is rapidly changing how traditional financial products are issued, transferred, owned, and recorded. Through blockchain technology, tokenization enables near-instantaneous transfers of ownership and record-keeping for traditional financial products, greatly facilitating the circulation and management of financial assets. However, tokenization also faces regulatory challenges; balancing innovation and risk will be a key focus for regulators.

II. The Continued Dominance and Potential Risks of Passive Funds

Alder pointed out that while active funds still hold a market share, passive funds have consistently attracted significant inflows over the past nine years, surpassing active funds in total assets under management for the first time this year. This trend has raised industry concerns about market concentration and potential risks.

Passive funds, particularly index funds, often concentrate investments in large companies, leading to increasing weightings of these giants in market indices, creating a positive feedback loop. This can boost the share prices of these large companies but also increases market volatility. If market sentiment shifts and investment enthusiasm wanes, these giants' share prices could experience sharp corrections, triggering significant market fluctuations.

Therefore, the continued growth of passive funds offers the advantages of investment convenience and low costs, but also carries the risks of excessive market concentration and systemic risk. Regulators need to closely monitor this trend and implement appropriate measures to mitigate potential risks.

III. The Rapid Growth and Challenges of the Private Capital Market

Alder also mentioned the rapid growth of the private capital market. Globally, assets under management in private capital have reportedly exceeded US$14 trillion, a threefold increase from a decade ago. The US market has seen the fastest growth, followed by Europe, while Asia's growth has been relatively slower, suggesting significant untapped potential.

The private capital market offers an alternative financing option for businesses, especially those requiring long-term investment. However, Alder stressed that for healthy development, sufficient transparency, effective liquidity risk management, and improved data reporting mechanisms are crucial. This is vital for protecting investor interests and maintaining market stability.

Private credit, a significant component of the private capital market, faces similar challenges. Balancing risk and return, and managing risk effectively while ensuring sufficient liquidity, are key issues in its development.

IV. Climate Change and Transition Finance: Issues that Cannot Be Ignored

Beyond the main forces, Alder addressed climate change and transition finance. Climate change increasingly impacts the global economy and financial markets, while transition finance provides crucial financial tools and mechanisms to address it.

Financial institutions need to actively participate and take responsibility in tackling climate change. This requires adjusting investment strategies and risk management frameworks to support green and sustainable development projects.

V. Uncertainty and Market Volatility: Challenges in a New Normal

Alder concluded that the world is currently in a period of high uncertainty. Geopolitical tensions, trade friction, and supply chain disruptions have significantly impacted financial markets. Combined with fintech, algorithmic trading, and index investing, market concentration has increased, and the speed of capital flows has accelerated, further amplifying market volatility.

Uncertainty and market volatility have become the new normal. Investors must adapt and employ strategies to manage market risks. Regulators also need to continuously improve regulatory frameworks to maintain market stability and protect investor interests.

In summary, Ashley Alder's address clearly outlined key factors influencing financial markets and provided insights into future trends. These factors collectively shape the complexity and challenges of the future financial landscape, requiring a collaborative response from regulators, financial institutions, and investors.