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The Privatization of Alpha

“Study the science of art. Study the art of science. Develop your senses — especially learn how to see. Realize that everything connects to everything else.” — Leonardo Da Vinci (~1500) "Hedge funds — there are too many of them and most of them are lousy." - Stevie Cohen (2016) The highest Sharpe Ratios - which, for the uninitiated, is a measure of risk-adjusted returns for specific strategies and financial portfolios - now live behind a declining roster of gilded gates. And the impacts of this "privatization of alpha" are enormous for the asset management industry and its stakeholders. Alphacution expects additional consolidation, concentration, re-engineering, disruption, disintermediation, and exits to be on the menu for this group along the road ahead. Here's the setup: Continuing on the overarching and transformational theme for how information technology impacts the constellations of strategies, players and markets in the financial universe, Alphacution has been leveraging its growing model library to focus on the development of a comprehensive asset management ecosystem "map" to demonstrate, along with many other [...]

By | 2018-10-24T23:07:46+00:00 October 17th, 2018|Alphacution Feed|

Does Big #FinTech Innovate? Introducing Alphacution’s #BigFinTech Index

Jensen Huang, CEO, Nvidia: "Software is eating the world, but AI is going to eat software..." One of the most fascinating aspects of innovation is its resistance to scaling. At least this is one observer's interpretation. Those trying to innovate at increasing scale - like, inside a large enterprise - might prefer to describe it as frustrating, to say the least. The rabid interest in startups - small groups of visionaries and entrepreneurs that are able to deliver radical levels of change to the provision of solutions for unmet market needs - is a reaction to this resistance. During the post-global financial crisis (GFC) hangover, it became vogue for large banks to establish externalized "innovation laboratories" to protect relevant and critical innovations from the harsh bureaucracies and incumbent politics inherent to large enterprises. Best case, they keep the proximity of innovation close; worst case, the messaging serves as a marketing tool. Of course, #fintech innovation has been a raging hotbed of innovation for the past few years, and many expect [...]

By | 2018-10-10T23:29:47+00:00 October 10th, 2018|Alphacution Feed|

When #Hedgefunds Ate Their Own

If you have bought into our arguments that the capacity of alpha is finite and that the leading managers of automated trading methods can achieve "winner-take-all" performance characteristics in the sources of alpha that they target, then it stands to reason that the causes for where assets are concentrating and which funds are closing are related. Without even looking at track records, these two facts lead to the conclusion that systematic strategies are more consistent than, and therefore, winning a battle over allocations to traditional, fundamentally-oriented and "manual" strategies in modern markets. Something amazing - and, potentially terrifying - is happening at the crossroad of asset management and global markets. The drumbeat of clues in support of this theme is increasing and those observers with keen insights into market dynamics are beginning to notice. Alphacution has played a small role in giving voice and illustration to this theme by placing a bow around a unique interpretation of unprecedented market phenomena worth paying attention to, most relevantly to this part of [...]

By | 2018-10-10T21:58:56+00:00 October 10th, 2018|Alphacution Feed|

#Hedgefunds: Is the Capacity of Alpha Unlimited?

Like the financial markets equivalent of "dude", or "bro" or the many satisfying derivations of "F**K," the term "alpha" seems to pepper our market discourse in a way that has few peers. Rightly or wrongly, there isn't an investment or trading context into which it is not shoehorned. We hear it everywhere, at all times, and in numerous forms: Achieving alpha... Delivering alpha... Portable alpha... (A strategy that had its heyday around 2006 and has recently tried to make a comeback.) Tainted alpha... (Not gonna go there right now.) And, my personal favorite (for its level of misguidedness), generating alpha... There are conferences named after it, like the CNBC and Institutional Investor ANNUAL Delivering Alpha Conference, now apparently in its 8th year. And, of course, some of the most brilliant and creative companies of all time have been named after it! - and, I'm not necessarily talking about firms like Visible Alpha or AlphaSense or the defunct quant strategy development platform, Alphacet... To be fair, the list of common usages [...]

By | 2018-09-23T22:12:39+00:00 September 23rd, 2018|Alphacution Feed|

α < ∞ ?

Like the financial markets equivalent of "dude", or "bro" or the many satisfying derivations of "F**K," the term "alpha" seems to pepper our market discourse in a way that has few peers. Rightly or wrongly, there isn't an investment or trading context into which it is not shoehorned. We hear it everywhere, at all times, and in numerous forms: Achieving alpha... Delivering alpha... Portable alpha... (A strategy that had its heyday around 2006 and has recently tried to make a comeback.) Tainted alpha... (Not gonna go there right now.) And, my personal favorite (for its level of misguidedness), generating alpha... There are conferences named after it, like the CNBC and Institutional Investor ANNUAL Delivering Alpha Conference, now apparently in its 8th year. And, of course, some of the most brilliant and creative companies of all time have been named after it! - and, I'm not necessarily talking about firms like Visible Alpha or AlphaSense or the defunct quant strategy development platform, Alphacet... To be fair, the list of common usages [...]

By | 2018-09-20T22:18:00+00:00 September 20th, 2018|Alphacution Feed|

Those Fees Are No Laughing Matter!

Image Credit: Arpad Busson and actress Uma Thurman attend the premiere of Zulu during the 66th Cannes International Film Festival  - Hubert Boesl/DPA/Alamy He pressed "record" on the cassette machine, leaned back and took a long, deep drag from a cigarette. "Let's begin," he said with a heavy accent. In a risky break from protocol, and much to the frustration of my partner - Quantlab co-founder and chief scientist, Ed Bosarge - I asked if I could bum one of his smokes. "But, of course," the Frenchman said with a smirk... Scene: Swanky leather-drenched, art-stuffed office, midtown Manhattan, 1998. Arpad "Arki" Busson, then already at 35 a legendary rainmaker for legendary hedge fund managers, like Tudor Investment's Paul Tudor Jones, had agreed to meet with two of the top geeks from a quant trading upstart to pitch their new strategy to his EIM Group, a prestigious fund of funds (FoFs) platform of the era. In a bizarre twist of unacknowledged credentials, it was difficult to pretend to ignore the fact [...]

By | 2018-09-16T22:59:19+00:00 September 16th, 2018|Alphacution Feed|

#Algorithm: Benchmarking the Cost of Post-Trade Processing

Patterns...  Preferably, persistent and predictable patterns...  It could be said that history is influenced by a series of pattern discoveries whereby new patterns are discovered with new tools, new technologies or new methodologies. Discovery always starts with variance of perspective, like a new pair of eyes.  And, that kind of trick never gets old - even during an era of hyper-intensive innovation. So, with that bit of philosophy as our backdrop, we arrive at today's lesson:  Alphacution discovered a persistent relationship between assets and headcount for asset managers, which led to new insights about strategy selections, technology spending, and workflow automation among a broad community of asset managers, hedge funds and others. This analysis was presented in its initial asset manager technology spending study, the Context Machine (April 2018). Upon further analysis, it turns out that there is also a persistent relationship between assets and headcount for asset servicers, like custodians and administrators. The significance of this discovery represents the beginnings of our ability to benchmark asset servicing costs and [...]

By | 2018-09-09T22:58:36+00:00 September 9th, 2018|Alphacution Feed|

Quant Invasion Continues As Data Infrastructure Overtakes Eyeballs

Clues... At it's core, this is much of what we are ever doing as a research and advisory operation: Looking for clues. Ideally, we are looking for the kinds of clues that recur as patterns. And then, tell the stories from those clues and patterns. (Better yet, if we can devise a mechanism to systematically discover more clues and more patterns with regularity, then we will have developed something quite valuable. But, I digress...) So, it was with great fascination that we discovered one of the next important clues; some evidence of the nature of transformation in the trading and investment world - and that which is indicative of so many other sympathetic movements in the broader financial industry. This is the falling of dominoes that we often refer to. Here's the gist: Quantitative methods are set to pervade much more of the traditional asset management community and a broader cross-section of the strategy spectrum. Likely more than expected. Reason being: Fee compression renders traditional investment processes too expensive and [...]

By | 2018-08-29T20:55:38+00:00 August 29th, 2018|Alphacution Feed|

Exposing Franklin Templeton’s Greatest Challenge: #ETFs

Exchange-traded funds (ETFs) may have their critics, but with nearly $3.5 trillion in total value represented by over 1,900 unique funds as of June 2018 (according to the Investment Company Institute - ICI), this segment of the market has grown faster and is now larger than total assets under management (AUM) of hedge funds (which BarclayHedge estimated at nearly $3.0 trillion for Q1 2018). Success is always the sweetest revenge... Sure, the naysayers point to numerous complexity factors - like variance in replication methods, tracking errors, liquidity issues, exotic-exposure risks, and others - to make their cautionary case and to send up warning flares to novice investors, but the blunt fact of the matter is that the well-designed, cost-efficient ETFs have had a profound impact on the financial landscape. That the downward trajectory of fees with competing financial products (like hedge funds and mutual funds) and the dramatic shift in asset allocations toward ETFs are among the most commonly cited attributes of the shifting landscape is obvious to most by [...]

By | 2018-08-14T22:50:52+00:00 August 14th, 2018|Alphacution Feed|

A Game of Thrones Breaks Out in #BigFinTech

The incumbency of incumbents continues... This play has been well-established in the hardware and technical infrastructure arena for banks. And, for students of this game, the drumbeat of clues has been steady in the software solution arena for all types of financial asset-handlers, as well. However, with the $1.45 billion acquisition announcement of Eze Software Group by SS&C Technologies Holdings, Inc. (SSNC) on July 31, 2018 - an event that comes a mere 11 days after State Street (STT) announces its acquisition of Charles River Development (CRD) for $2.6 billion - it is clear that the turf war in what Alphacution calls "Big FinTech" has heated up to a new level of intensity. Here's why: There's a greater chance of controlling the "means of production" - the toolbox for trading and investment workflows - from the middle than from the front or the back. Yes, at-trade solutions like order and execution management systems (O/EMSs) are quite sticky, but these latest maneuvers with CRD and Eze are much more than that. [...]

By | 2018-08-28T20:17:22+00:00 August 2nd, 2018|Alphacution Feed|