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AI-led Hedge Funds have delivered cumulative returns of 3X the overall Funds universe

A recent analysis by Cerulli Associates, a provider of global asset management analytics, of the assets under management (AUM) and net new flows of Europe-domiciled AI-led funds from 2013 to April 2020 shows solid AUM growth from 2016 to 2019. Notably, the research finds that the cumulative return of AI-led hedge funds was about three-times the overall returns clocked by the hedge fund universe during this period: 33.9% compared to returns of 12.1%. The report finds that European AI-led active equity funds added assets at a faster rate than other active equity funds from January to April this year. …

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Mr. Omkar Shah is the CEO of a well-known retail chain in India, one of the fiercely competitive retail markets in the world. Although the company had been doing well, Mr. Shah was stressed of late due to slowing profitability and below-par growth in many new branches. He was not been able to pin-point the exact reasons for this decline, despite having all the data and wisdom of the best minds in the sector at his disposal. Enter business intelligence and data visualization. We will get back to Mr. Shah a little later.

Organizations today, have access to massive in-depth data. However, possessing data and using it effectively are two entirely different things — and the latter is equally, if not more important. This is where data visualization comes into play. The concept of ‘a picture is worth a thousand words’ comes in handy when making a point that could take a lot longer without the benefit of visuals. A good visualization has the power to turn static data into a cohesive story that can be understood by everyone. …

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The current COVID-19 crisis is causing economic as well as social disruptions, and businesses are no exception. Though central banks worldwide have announced various multi-billion-dollar stimulus packages to contain the economic impact, it has still failed to boost investor confidence.

The business leaders today are facing a multitude of challenges in order to control the ramifications of the pandemic. Every business, whether small or large, is facing challenges related to business continuity, risk mitigation, and workforce management. The same is true for PE firms as well, irrespective of the size of the business, whether small firms or global buyout behemoths. It has become difficult for companies to gauge the extent of the impact of the coronavirus outbreak along with ongoing financial uncertainty. Though for many experienced investors economic challenges are not completely uncharted territory, the COVID-19 crisis has put forward a unique scenario for businesses. …

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The world is in the midst of the COVID-19 pandemic trying to control the social and financial fallout. The already struggling financial markets have nose-dived due to the world economy coming to a grinding halt. Social distancing is being practiced across the world to flatten the infection curve and give the government and administration a fighting chance. Pharma companies are working tirelessly to develop the vaccine, which is estimated to take about 18 months for it to hit the markets.

History shows us that humans have been through multiple pandemics and every time we emerge stronger we adapt to the new environment and find a way out to tackle the new challenge. …

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The Indian banking industry is undergoing a radical change driven by intense competition from new entrants in the industry, continuously evolving regulatory environment and the changing business models. Technological advancements and innovations have further altered the business landscape for all financial institutions, whether banking or non-banking.

Along with technological changes, the industry is also witnessing a demographic shift in customer interactions. The entry of global players in the banking industry has further propelled the customer expectations.

Therefore, banks are searching for ways to gain a distinct competitive advantage which will set them apart from other players in the industry.

The increasing relevance of ATM as a client engagement…

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Big Data and Advanced Analytics have become a significant source of competitive advantage for many industries. However, a closer look shows that apart from a few innovative private equity firms, most have been slow to adopt the big data approach when compared to hedge funds, banks, and other financial market participants.

We have observed that partners at private equity firms have a notion that these technologies are only helpful for high-frequency traders and quant funds. However, forward-looking PE firms have put data and advanced analytics to good use to derive competitive advantage.

PE’s Primary Challenge

Every Private Equity firm has two critical areas of work, identifying new investment opportunities and monitoring their existing portfolio performance. A few firms have demonstrated how they use data and analytics to carry out both these tasks. …

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Asset-backed securities (ABS) and Mortgage-backed securities (MBS) are two important types of asset classes within the fixed-income sector. ABS is created from the pooling of non-mortgage assets while MBS is created from the pooling of mortgages that are sold to interested investors.

MBS can be further bifurcated to Commercial Mortgage-Backed Security (CMBS) and Residential Mortgage-Backed Security (RMBS)

The CMBS is a type of fixed-income security collateralized by commercial real estate loans. These loans are given typically for income-generating real estates such as office buildings, hotels, malls, apartment complexes and factories. A CMBS provides liquidity to real estate investors and commercial lenders alike. …

Retail banks generate value through a mix of businesses like financing, investing and by doing financial transactions for their customers. Banks have been offering basic banking services for free and charging an attractive margin in other areas like credit card fees and foreign exchange transactions. On an average 59% of the bank’s earnings come from fee-based products and services like advice on payment, origination, sales, etc. which forms an important part of the banks P&L statement.

There is a growing trend of using data and analytics in the financial services industry. Banks are using Artificial Intelligence and Machine Learning to improve their operational capabilities. These technology initiatives are empowering banks to discover new ways of revenue generation. Banks can acquire and retain a large customer base while being profitable by following a data-driven approach. They have realized the value hidden in the unused data and analytics capabilities, making it the global trend for the retail banking industry in 2019. …

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In recent months there has been a spate of news of stress in Indian businesses, both financial and non-financial businesses. Commentators are assigning various causes for the same.

However, in our view, the main cause of this stress is the unbearable burden of astronomically high real interest rates charged by the Indian banking industry, especially private sector banks, to Indian businesses.

The chart below shows real interest rate burden on Indian businesses. The real interest rate for each month is computed as average bank lending rates for the previous twelve months minus average CPI inflation for the same previous twelve months. …

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Active managers continue to face strong headwinds for a couple of reasons. There is a strong market which is driven by liquidity on steroids. Then there are passive funds with dramatically low management charges, and the less than the ordinary performance by a large segment of fund managers haven’t helped either. However the final nail on the coffin has been the cavalier, but well-directed actions by regulators. These headwinds have exposed the weakness and inertia of many industry participants.

Need for innovation

Everything flows, and nothing abides, everything gives way, and nothing stays fixed.” — Heraclitus

Investment management industry has the presence of many large investment institutions, some of them in existence for over a century and some more recently. These institutions have established investment practices which are considered as a holy grail for successful investing. However, these Investment research methodologies have not seen any innovation for many decades. Technology has made it possible for the perfect implementation of such research methodologies, to add to that information and data is now freely available and easy to access. Even retail investors have the same access to information and data as most institutions. …

About

Decimal Point Analytics

Decimal Point Analytics is a 15-year-old, financial services company providing Research, Data Management Solutions, and Advanced Analytics Services.

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