At a recent gathering in New York City of institutional investors and fund managers, a straw poll was taken to gain insight into planned expenditures on data, technology, and analytics. A resounding 83 percent of attendees at the Cayman Alternative Investment Summit (CAIS)-hosted event said their firms would increase spending on these categories in 2018.
Such a heavy majority favoring greater outlays on tech might suggest that, in the world of alternative investing, anything digital and cutting-edge is top of mind. Fast-developing technology can’t be ignored, even though the net benefits can be difficult to foretell. With each apparent breakthrough that appears, the industry confronts a train-leaving-the-station scenario – even as common sense says you can’t board every train.
If there is indeed a dichotomy between tech that is must-have and tech that is must-scrutinize, you’ll find no clearer example of it than Blockchain and Bitcoin. Whether one defines a crypto-currency like Bitcoin as an actual currency or merely a tradable commodity, its entire existence is predicated on Blockchain’s platform, featuring a “distributed consensus system” for verifying transactions. Thus, a thing created to provide security and predictability forms the basis for something that is enigmatic and widely associated with speculation.
And so, among thought leaders, there are calm but impassioned testimonials for Blockchain, beginning with the famed TED Talk by Bettina Warburg in June of 2016 – a viral video that long passed the 2 million views mark. Meanwhile there is no shortage of skeptical commentary about Bitcoin to go along with its dramatic price run-up. If nothing else, the great Bitcoin rise of 2017 opened the gates for more fresh analysis about the “emotional factor” in investing than has been heard in many years.
Most disruptive technology
Attendees at that New York CAIS satellite event were also polled about perceived value of various technologies and their likely effect on markets and society. Some 43 percent said Blockchain would prove to be alternative investing’s most disruptive technology over the next five years. Down the list of rival disruptors were artificial intelligence (AI) – 35 percent considered it most likely to disrupt—followed by self-driving vehicles (35 percent) and robotics (4 percent).
Of course, when people call Blockchain “disruptive” there is some irony in their use of that term, given the many practical solutions for financial IT that Blockchain promises. Frequent CAIS presenter Amin Rajan, CEO of London-based CREATE-Research, stated that case emphatically in a recent paper, touting Blockchain’s potential to “disintermediate trading, payments, and settlements in real time – and at a fraction of the cost.”
Hitting the road beyond finance
It’s not just the finance sector that is ripe for such streamlining. At the website for Animal Ventures, which Warburg co-founded and co-owns, a persuasive blog post depicts Blockchain as the basis for a new and better way to manage one of the least abstract of all economic activities, truck transport of goods and commodities – once all 18-wheelers in a typical fleet go driverless.
“If a road hazard is detected by a vehicle,” states the post, “it benefits the entire industry if other trucks are alerted to this hazard. How can this be accomplished without a driver? Blockchain can be a protocol to communicate this information, and even weight its value via a localized consensus.” For anyone already familiar with telematics as a tool for fleet management, the case made by Warburg’s group for adding Blockchain to the “smart truck, smart highway” equation is compelling.
Such unforeseen benefits of Blockchain, or any other tip-of-the-spear platform, will only augment the bullishness that tech currently inspires among alternative investment specialists. The industry is at a point where expectations run high for harnessing tech’s power to deliver better returns, open up new opportunity sets, do old things in sleek new ways, and deliver a compelling value proposition across the board.
In his role as chief technology officer at WorldQuant, David Rukshin would naturally share that optimism, but Rukshin does recognize a problem or two amid all the promise. With the exponential growth of data, quantitative investment firms like his – WorldQuant maintains 25-plus offices in some 15 countries – have to keep themselves deeply staffed with exceedingly brainy people.
“Our reliance on technology continues to grow, and there is more complexity to the technology we utilize,” says Rukshin. “This means we need more sophisticated people to make sense of the technology, and add the needed human filter.” He acknowledges that technology is making more aspects of the research process simple and effective, but that’s not the whole story. “Finding the right talent who can do what is necessary is becoming difficult,” Rukshin says.
Constant search for “new signals”
Technical traders have always sifted through market performance looking for patterns and indicators they call “signals” and the so-called quants do so with maximum intensity. A quant firm will skip over tried-and-true techniques and seek to develop innovative approaches for looking at data—searching for new ways to represent, parse, and clean it—that will add up to differentiation. The changing nature of the market, however, can create a situation where signals don’t have longevity, meaning new signals need to be found all the time. When a commitment is made to that next level of data refinement, it’s like the movie studio that hires a top director –costs go up because now only the most expensive sets and actors will do.
“You need to try to make sure that the signals you find can overcome research and transaction costs,” explains Rukshin. “Hardware and infrastructure will become more expensive as you build more sophisticated models.”
Quant firms are inclined to leave no scientific stone unturned. Still, eagerness to experiment doesn’t equate to a total absence of skepticism. Asked about shiny new objects like AI, Rukshin takes a positive stance then adds an understandable grain of salt.
“Over time, there is going to be greater adoption of the new techniques that become available,” he says. “With some of the new AI techniques, I think there will be disillusionment, but then there will be others that aren’t expected to be useful and in fact will be.” It’s when you ask him why this would be that Rukshin provides the grain of salt: “Humans,” he says, “aren’t great at predicting what is hype and what is real.”
Any human who has seen business cycles come and go would surely plead guilty to that one. Of course, getting excited about something before its value is proven is probably a prerequisite for producing magnificent new inventions in the first place. – David Gould
For more information about the 2018 Cayman Alternative Investment Summit, please visit www.caymansummit.com.