Finadium will be covering QuantStrats Europe, taking place on October 8 in London. With securities financing and collateral processes going increasingly electronic and dependent on data and technology, we hear from expert panelists representing two different kinds of asset management firms, Amundi and Global Evolution, about the key topics and trends up for discussion across a variety of financial instruments.
The ETF market has seen tremendous growth that’s accelerated over the last couple of years, said Hamza Bahaji, head of Financial Engineering and Investment Solutions at Amundi Asset Management ($2.4tn AuM), who will be speaking on the Anticipating scenarios for known knowns, known unknowns and unknown unknowns panel.
Bahaji has been in quantitative finance for over 20 years in various roles on the buy-side, joining Amundi in 2019 in the firm’s passive portfolio management arm, Amundi ETF Index and Smart Beta. In this role, his team designs and builds passive solutions as well as interrogates assumptions underpinning related investment processes.
Research firm ETFGI reported that assets invested in the global ETFs industry reached a new record high of $13.61 trillion at the end of July, beating June’s record of $13.14 trillion with year-to-date net inflows at $947 billion, the highest on record and 62nd month of consecutive net inflows. This is paralleled with the broader ETF ecosystem — options, lending and collateral — which increases liquidity and benefits investors, explained Nikolay Rashkov, vice president for ETF Capital Markets at BlackRock, speaking during a webinar hosted by S&P Global Market Intelligence.
“Regardless of whether an ETF investor lend their shares, this activity brings stability to the market and provides benefits to all investors trading ETFs,” he said. “We’ve also seen that ETFs with an active borrow and lend market exhibit substantially tighter bid-ask spreads, thus resulting in better liquidity and lower transaction cost for the end investor.”
While Bahaji’s unit works closely with portfolio managers, he noted that securities financing is housed in the separate Amundi Securities division and declined to comment. However, much like the rest of the European asset management sector, T+1 has had direct implications for securities lending in terms of, for example, what holdings are attractive to loan out.
“For European based asset managers, (T+1) might have significant impact on designing and managing portfolios and securities lending (that) would potentially either prompt European asset managers that have trading desks in the US to keep investing in them or those who do not have trading desks to potentially, if there’s a trade-off, set up those trading desks or, alternatively, prompt automation of the trading processes,” he said. “It is a very pressing issue, at least for passive portfolio managers.”
This regulatory disruption is among the trends that Bahaji points to as part of the overall topic of the panel he will be speaking on, which also tackles the heavyweight topics of climate risks, geopolitical uncertainty and market shocks, particularly as part of understanding how portfolios can be effectively stress tested.
Climate risk
Climate investing is entering a “second phase” of maturity as focus shifts to the “E” of environmental, social and governance (ESG) pillars, which raises challenging technical questions on managing tracking error implied by the integration of those objectives in a quant strategy, he noted.
At the same time, new technologies, particularly generative artificial intelligence, are entering a full implementation phase: in marketing functions as well as automation of the request for proposal and response (RFP and RFR) processes at the asset manager, and more broadly across financial services, in the compliance function to assess, for example, fraud risks.
“We’ve been hearing about LLMs [large language models], ChatGPT, NLP [natural language processing]…we start now to see actual use cases in the asset management industry (that) leads to material accessible benefits,” he said.
A thousand analysts onboard
In the competitive landscape of investment management, adopting new technologies is critical for survival, said Ole Jorgensen, director of Research at Global Evolution, who will be speaking on the Portfolio construction and optimization across a diverse global terrain panel.
Global Evolution has some $11 billion AuM, investing in the specialized sector of emerging and frontier markets’ sovereign and corporate bonds, including niche geographies such as Zambia, Mongolia, Ecuador and Uzbekistan alongside more widely held Mexico, Brazil and Indonesia securities in portfolios.
In the lowest income countries, social economic developments, sometimes segmented as the “S” pillar in ESG investing, have significant importance for European, and particularly Scandinavian, pension funds, he said.
It was an area that Global Evolution moved in on early, boosted by experimentation with advanced technologies such as artificial intelligence to help manage money in frontier markets, for which Jorgensen said that it is a myth that there isn’t enough data to run algorithms for quantitative analysis.
“It’s often a surprise to people where we invest…it sounds very exotic, but there’s lots of information out there about these issuers,” he said. “We got started very early on ESG and AI and that has helped shape the last decade of development in our company.”
Holding a portfolio of corporate bonds from emerging and frontier markets may be a matter of a thousand companies across benchmarks, he added: “If you have algorithms that help you filter through what’s important and less important and gives you tailor made input every morning after reviewing everything in a second, it’s the same as having a thousand analysts working for you.”
Discomfort zones
The gap between what’s being spent to build out AI, mostly by tech companies, and the actual revenue realized by that investment is $600 billion this year, up from $200 billion in September 2023, according to David Chan at Sequoia Capital, cited by AI research firm Evident: “Markets are asking big tech hard questions about when and where we’ll see tangible returns on investment. The world’s leading banks are getting them too.”
Jorgensen recognized that there is a great deal of skepticism added to the AI hype, but he also urged market players to move past their comfort zones responsibly, beginning with testing and experimentation.
“Comfort zones really are where ambitions go to die. It is mostly about talking the walk, right now, has been for a couple of years, but things are evolving extremely quickly,” he said. “In the short-term people typically get a little bit disappointed and run out of patience, but this is the time when people should be tenacious (because) in the medium to long term, these [new technologies] will have huge effects on almost every aspect of our businesses, and also in portfolio construction, where signals from alternative data can become a totally new alpha driver.”
Hamza and Ole will be joining colleagues from Astarte Capital Partners, Kaiju Capital Management, LBBW Asset Management, LGT Bank and XAI Asset Management to discuss these and other major developments at QuantStrats Europe, taking place on October 8 in London. Use code “Finadium20” for a 20% discount.