I have seen the future of cap intro, and it is called AltX
Only those ignorant of the past would genuinely claim to have seen the future. It would take an intellectual to add that the future they saw actually works. But this week I understood for the first time why people are tempted to claim that they have seen a future that works.
AltX is a technology platform where investors can meet hedge fund managers and vice-versa. Nothing new about that idea, you might say, but only if you have not yet seen AltX. This platform has the potential not just to reinvent the capital introductions business, but to transform the way sophisticated institutional investors (there are some) and private banks buy and manage investments.
AltX is the brainchild of Sam Hocking, the former head of prime brokerage at BNP Paribas, which he joined when Bank of America sold its prime brokerage business to the French bank in 2008. A couple of years ago, he told me that he thought the future of the investment banking and investment management industries lay in technology.
AltX is a vivid demonstration of what he meant. Up to this point, the investment management industry has used technology for limited purposes: to accelerate the speed at which data is exchanged, and to increase the efficiency with which it is processed. It has, crudely speaking, automated what was being done already. The industry has not used technology to transform itself.
Yet at bottom AltX is not just a technology platform. In fact, it is not even a financial services technology platform. It is a machine built by scientists and data analysts for turning data into information in much the same way that an internal combustion engine is a machine for turning hydrocarbons into motion. The machine is clever enough to learn from what it does to improve the quality of the information that it produces. That information not only provides the increased degree of certainty which is the stuff of intelligent decision-making, but encourages decision-makers to give the machine more data.
Allocators at institutional and retail investors can upload all of their alternative investment portfolios, including all their investment agreements, and they will be searchable, because AltX can read unstructured texts. In other words, AltX is not just a match.com for hedge fund managers to meet investors. It is a place of work for allocators, where they store details of their portfolios, benchmark and monitor them, and adjust them. The offering is less expansive for managers, but they can also upload their private data into AltX, and use it to compare themselves with their peers in much the same way that allocators do.
The number of comparators is large. AltX currently has a screenable universe of 16,000 hedge funds. The obvious way for an allocator to make use of it is to select a manager. Investors that need, for example, to invest 10 per cent of their assets in an event-driven hedge fund strategy with a 5 per cent benchmark rate of return can screen all of the funds that match those criteria. The closest matches are shown as larger circles on a scatter chart, and can be examined in greater detail by clicking through.
That initial selection can then be further refined by other criteria, such as one, two and five year rolling returns, one, two, three, four and five year alpha, beta or Sharpe Ratio. There are 50 filtering factors in all, ranging from annualised returns to women-only funds. All of the statistical measures in this lengthy list are calculated by AltX analysts, and coded by AltX engineers.
The data which feeds the algorithms comes from several sources. AltX taps all of the major third party sources of data (Barclay Hedge, Lipper, Eureka and HFR) plus the publicly available data collected by regulators (such as the annual Form ADV and quarterly 13Fs filed by managers with the Securities and Exchange Commission (SEC)).
The machine combs these data sources not only for numbers but for words, in search of correlations between the frequency with which words are used and the sophistication and character of a manager. AltX also uploads proprietary data from the funds themselves, and from investors, which will improve the reliability of the data over time. In fact, AltX is looking to reduce its reliance on third party data, and so create its own proprietary information.
The basic analytical tools can sort portfolios by security codes, positions, numbers of securities held, and currencies. They enable users to run simulations and correlations, customise benchmarks, run regression analyses, liquidity calculations and stress tests, and look for over-exposures created by overlaps in the assets held by different managers.
One tool allows users to divide groups of funds into “clusters” by any chosen mix of factors – say, strategy, mandate and domicile – to facilitate further comparative analysis. Another tool that is bound to appeal to allocators is the ability to search for lookalikes. It means that an investor who likes a particular strategy, but finds the performance of an existing manager is flagging, can find something much the same almost instantly.
Indeed, the speed of the calculations - based on parallel computing - is remarkable. The results of 500,000 Monte Carlo simulations on one model portfolio shown to me appeared instantaneously. At those speeds, the savings in spreadsheet time alone must make the subscription fee worthwhile. In a sense, technology like this is akin to reading. The ability to read, by relieving the mind if the burden of memory, creates time to think. AltX creates time to take better-informed decisions.
The information available is not restricted to the quantitative either. AltX looks for behavioural as well as analytical or financial compatibilities between managers and investors. It invites both fund managers and investors to complete behavioural questionnaires, so its understanding of the motives and risk appetites of individuals on both sides of the market is as full as possible. The benefits for both managers (stickier capital) and investors (closer alignment with managers) are so obvious that the questionnaires are proving popular with clients.
AltX has found neither investors nor managers reluctant to take part in a timed “implicit association test” (IAT) designed by a Harvard clinical psychologist to distinguish between conscious and unconscious preferences in stable and unstable market conditions. The results allow managers and investors to understand the difference between how they think they perceive risk and how they actually do. Using this kind of science in financial decision-making is something genuinely new.
Decisions are of course affected by social connections as well as individual psychology, so AltX incorporates a “social discovery” tool. This draws digital maps on the basis of data extracted from around 150 publicly available sources information about individuals working in the hedge fund industry. The sources are wide enough to permit an almost impertinent degree of insight into the behaviour of individuals.
Users can get information on where asset allocators and portfolio managers are travelling (based on federal aviation administration data), what political contributions they have made, whether they are divorced, media stories about them, their personal wealth as disclosed in the ADV declaration, who they were at school and college with, who shared their fraternity or sorority, their previous jobs and board experience, their height, weight and BMI, even their gym memberships, and who they have worked with in the past.
This is the kind of deep background assessment which due diligence professionals have conducted on portfolio managers for years, vastly expanded and accelerated, and visible instantaneously in graphical form on a screen. Interestingly, AltX says fund managers enjoy using the tool, not because they are self-obsessed, but because they want to understand how investors perceive them and their competitors, and how actual and prospective investors behave as well.
In principle, all of that information is available to managers and investors by other means. In fact, every piece of data used by AltX - save the private information submitted by managers and investors - is available to anyone. What is valuable about AltX is that it brings these disparate sources of data together on a single platform; organises the data into conventional investment analytics, behavioural preferences, and social networking due diligence; and then amalgamates and reconciles what managers and allocators want to see sufficiently seamlessly to put all three factors on a chart and draw the attention of the user immediately to the points on the quadrant where his reason, psychology and level of personal trust find their best match.
This is the real value of AltX: it puts a lot of data and sophisticated analytical tools in the hands of anyone who knows what they want to see and can use a mouse. It is rocket science, but rocket science for dummies. It is not even that expensive. Allocators can subscribe to the investment and behavioural analytics for $12,000 a year, and managers for $3,000 a year. The social discovery tool costs an additional $18,000, and cannot be bought on a stand-alone basis. In other words, an allocator can access everything AltX has for $30,000 a year, and managers for $21,000 a year.
Doubtless the price will rise as AltX expands its reach. At present, AltX covers hedge funds only, but the technology is in principle extendable to any asset class with a large enough data set, and the firm is raising additional capital to embark on exactly that journey. The short term ambition is to expand into a wider array of alternative asset classes, such as private equity and real estate, and the long term ambition is to encompass traditional asset classes, including '40 Act and UCITs funds. Clients are already asking for this additional data.
Intelligent decision-makers get the point. AltX has sold 100 licences already, and reports interest from public and private pension funds, registered investment advisers (RIAs), investment banks, private banks, endowments, pension funds, wealth managers, private clients, capital introduction groups at prime brokers, and fund managers themselves. Even investment consultants are asking to work with AltX.
This last group is both a surprising and an unsurprising source of enthusiasm for the concept of AltX. For them, AltX must appeal to a fascinated Todestrieb, since it demonstrably sounds the overdue death-knell of their snake oil profession. As one recent study of the U.S. equity recommendations made by investment consultants concluded: “We find that consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows. However, we find no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.”
AltX marks the beginning of the application of hard science to investment recommendation. And “beginning” is undoubtedly the right word, since science is nothing if not the unceasing search for better and better explanations of how the world works. In fact, if anything remains worrying about AltX, it is the familiarity of the terms on its litany of analytical factors: Alpha, Beta, standard deviation, kurtosis, VaR, Sharpe Ratio and so on. Our knowledge of how markets and their agents work is vastly improved, but is still trivial in relation to the scale of the problem. The events of 2008 defeated every one of the algorithms still in use every day by the investment management industry, but its denizens still awaits the reinvention of its intellectual inheritance.
If I have understood the spirit of AltX correctly, its progenitors understand the limitations of current methodologies, and will adopt any techniques that can overcome their limitations. The founders of AltX are imbued with the spirit of rebellion which informs all true science. It starts from the premise that how capital introductions and investment recommendations are done today has no authority that can insulate it from interrogation. By questioning the status quo, AltX will earn the enmity of many established interests. But if it remains true to its spirit in the face of relentless opposition, it will drive amazing improvements in the performance and reputation of the investment management industry.
 See Tim Jenkinson, Howard Jones and Jose Vicente Martinez, Picking winners? Investment consultants recommendations of fund managers, Said Business School, University of Oxford, 13 June 2014.