Machine learning for actively-managed ETFs

It’s been one year since my landscape post on AI in Digital Wealth mgt: Sniffing out investment opportunities and the conversation continues on the Fintech Genome with the addition of new ventures and with other insightful conversations around whether Could fund strategies be better managed by Intelligent ML/Ai based platforms?

This is all happening while the rise of passive investing continues and the push for non-active ETFs continues. Statistics show that human stock picking is in decline, with Blackrock showing 64% of its assets under management in passive-focused index and exchange-traded funds and only 29% in funds that follow active strategies.

AI in digital wealth management clearly isn’t about passive and indexing. It is about discovering new sources of alpha, managing risk in a better way or about democratizing access to certain kinds of alpha. AI in wealth management is always about extracting value from data, whether it is natural language data, sentiment analysis, or numerical data processing.

Today I’ll zoom into a partnership between two AI&ML analytics providers and two Fintechs, that aims to capture alpha and offer it to all of us, in the most popular wrapper, the ETF.

Watson is not new to financial services. It is behind various IBM initiatives (e.g. IBM Cloud for financial services) and it is powering already some Fintechs, like Alpha Modus, focused on asset management services using cognitive analytics. None of these ventures have packaged financial instruments ready to be added to our portfolio.

The AIEQ ETF to be listed on NYSE

The AIEQ ETF pending its approval will be listed on the NYSE. It is the brainchild of a triangular collaboration between Watson + TensorFlow, Equbot, and the ETF Managers Group.

Watson shares its ability to parse text (news, articles etc) to uncover catalysts that can affect (positively or negatively) the individual stocks and real estate trusts under consideration.

Equbot, is the US based Fintech that sprung out of the IBM Global Entrepreneur roaster. It leverages the Watson AI abilities, to build predictive models that combine fundamental analysis and Machine Learning. It uses the open source Machine Learning libray TensorFlow to build the Equbot model. This model identifies 30-70 US stocks on a daily basis that have the greatest appreciation potential.

The ETF Managers Group (ETFMG), is the largest private ETF issuer/manager in the US, and is managing the process of filling for an ETF to be listed on the NYSE. The ETF is named the Equbot with Watson AI Total US ETF (AIEQ). Equbot is the subadvisor to this fund. Through its partnership with Watson and TensorFlow, it will develop the Equbot model which is driving the actively managed fund decisions.

Actual risk-adjusted performance can only tell whether stock picking based on the combination of ML software and cognitive analytics, is generating alpha after the taking into account the costs of active trading and managing the ETF wrapper.

Efi Pylarinou is a Fintech thought-leader, consultant, and investor. 

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2017 Tech, Strategic, and Investment trends in WealthTech

watson.jpeg

Watson helped me write this post. I fed him all Daily Fintech posts from last year and all the conversations on the Fintech Genome and gave him access to all my Tweets, Quote Tweets and Replies (he said he couldn’t access my Linkedin interactions; are they gated?).

Paolo Sironi and Susan Visser, would welcome such a use-case of Watson’s capabilities; but for now it is only in my dreams that this happened which I dare to share with you today since it is “Charles Dickens season”. I don’t qualify as poor in the conventional social understanding but I am poor in cognitive tech resources for my Fintech thought leadership.

Last year in December we issued a Warning (just before the traditional year-end predictions)

The truncated message from the myth of Icarus, is that it is dangerous to fly high; but the forgotten message is more important for Wealth management: “It is equally dangerous to fly low”.

It is Not Safe anymore to continue “business as usual”. This is a Warning.

The warning is still very valid and the only clarification I’d like to add is that when we talk about “Wealth Management” don’t just think we are referring to services offered to mid to higher end clientele. This category extends to any level of “wealth creation” that can be derived from small amounts of conventional currency savings, or a low digital credit score. It also encompasses the Capital Markets infrastructure and the regulatory environment which sets the rules of the game of wealth creation at a wholesale level.

End-users continue to push the transformation boundaries. Fintech startups, incumbent institutions in financial services, Financial software vendors, Telcos, and Cloud service providers, are responding to this unstoppable trend. The old adage “If it aint broke, don’t fix it” isn’t anymore valid. The Icarus warning “It is equally dangerous to fly low” encapsulates the reality of our era that is breathing down our neck “Danger to become obsolete”.

For our smartphone readers, I am confining myself to an outline of themes in Wealth Management and Capital Markets for 2017:

The 2017 technology-led trends

  • AI and ML will be the technology that will be “a must have” shifting from “nice to have” and “transactional only”. AL and ML will be leading the movement towards Invisible and Contextual wealth management services. For those that have been investing in AI for many years and have yet to be compensated for being early; 2017 will provide them with great signs of relief. This era will be the AI& ML Walk and Talk starting 2017.
  • The macro environment will continue to be challenging and will result in a genuine shift in wealth creation. For years, it has been Buffet vs. Soros (fundamental vs. macro) and passive vs. active. 2017 will be the year that we will increasingly entrust wealth creation to AI & ML guided processes (mostly actively managing passive financial products (like ETFs) and customization towards goal-base investing).
  • 2017 will be the year that it becomes clear that an API offering will leapfrog a White Label offering. For those that have both and are agile, it will be work out very well.
  • 2017 will be the year that the ISDA agreements in the Swap market give way to Smart contracts.
  • There will be more digital wallets opened in 2017, than any other adaptation of a Fintech service (payment service, digital bank account, robo-advisor etc). Looking at new financial assets for 2017, there are two possibilities to consider. The P2P loans as part of our fixed income allocation and cryptocurrencies as part of either our FX exposure or to include in the commodities allocation or the inflation protection risk buckets. Both have significant regulatory hurdles to face, however, the rate of adaptation of these new assets (not yet recognized as such) will favor significantly cryptocurrencies. P2P loans as an new asset class will not gain significant traction in 2017.

The 2017 strategic trends

  • We will be seeing more of the “Sell-side empowers the Buy-side” shifts mainly out of the US.
  • We will be seeing more cross-selling innovations in wealth creation launched by the incumbents and partnerships of Fitnechs; the US and China will lead.
  • The Transparency movement in wealth management will pick up speed. 2017 will be about Transparency rather than Disintermediation, which became “out of vogue” already in 2016 with more collaboration between startups and incumbents than genuine disruptive moves.
  • 2017 will be the year that IBM, Microsoft, Amazon etc, the Big cloud computing providers will no longer be the Gorillas on the Fintech stage that go unnoticed.
  • 2017 will be the year that Asset managers wake-up and shift from asset-gathering mode and the traditional way of managing the entire investment cycle process. From all parts of the ecosystem they have been by far the laggards. Brokers have been the leaders on the transformation highway.
  • 2017 will also be the year that private bankers and independent Financial advisors are brought further up to speed. The incumbents for which private bankers work for and the affiliated incumbents that the IFAs collaborate with (for custody or execution etc) will empower them.
  • European regulators will continue to lead. PSD2 will influence all other continent regulatory thinking. The FCA will focus more on international collaborations. The Global Innovate Finance summit will become more of a genuine global summit.

The 2017 investment trends

In this part, I share my predictions and also pose a few questions (I don’t have the answers on their timing) because they are important considerations to keep in mind.

  • Alternative wealth creation in 2017 will only refer to what Secco bank is aiming at (i.e. create wealth from digital assets like reputation and monetizing our own data) and cryptocurrency investing.
  • In 2017 I will be writing more about emerging cryptocurrencies investment managers rather than Vanguard, Betterment, and Fidelity and their investment performance. In 2016, we only watched cryptocurrency exchanges and brokers.
  • The cash piles that are sitting around the world wont be reduced significantly in 2017, simply because those chasing them (from Fintechs to incumbents) are in their second phase of innovation and users (like myself) still have to consider three dozen apps to cover all financial needs from Fintechs.
  • The ICO unstoppable trend will continue but will remain predominantly for blockchain related ventures. In 2016, the first steps in shedding light in the very opaque private markets were taken (Title III in the US, ICOs, Stock exchange innovations for private companies to prepare their IPO). This trend will be slow in penetration but will continue with the East joining.
  • Will 2017 be the year for the huge market opportunity of Chinese robo-advisors to create and offer an investment portfolio that can truly match the risk profile and goals of the Asian end-users; rather than being constrained from the very limited local investment pallet?
  • Will 2017 be the year that we all start considering investments in the Goldmans’ or the Alibabas’ because of their strides in Fintech innovation? This I foresee, is two years down the road.

Have a great holiday, for all our readers taking a digital break starting this week.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.