Data Analytics: Risk Mitigation in Financial Investments v01
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Transcript of Data Analytics: Risk Mitigation in Financial Investments v01
Data AnalyticsRisk Mitigation in Financial Investments
Sumir Nagar - Chief Operating Officer Agile FT LLC, Dubai, UAE
www.agile-ft.comat
Shailesh J Mehta School of Management - IIT PowaiMarch 18, 2017
The opinions of the presenter are his individual opinions and/or advise, and are not to be construed as those of Agile FT LLC, Dubai, UAE.
Investments are subject to market risk and prudence is advised when investing in financial instruments.
Thanks to the School, Vinod, Aditya, and Shasti
House Rules & Etiquette
You can survive without your cellphones for a few minutes
I’m a big fan of interactive, let’s try and wait for logical breaks before we debate, discuss, comment
So that we don’t talk over others, please indicate that you have something to say
I’m Usually Unpopular• Just a little about me• This is a much larger topic & I will try to do justice in 60 minutes• What I have to say can be construed to be CONTROVERSIAL
• What I have to say is NOT ROCKET SCIENCE
• Simply because Data Analytics is NOT ROCKET SCIENCE, (despite our best efforts) to cast that impression
• I deal with• Basics - (usually forgotten)
• Common Sense - (The Most Uncommon Thing)
• Prudence - (Whatever That Means)
Who Is The “Investor”
• Individual
• HNI
• Mid Income
• Low Income
Who Is The “Investor”
• Corporate
Who Is The “Investor”
• Financial Institution
• Bank
• Insurance
• Pension
Understanding Risk
Risk & Reward Are Closely Intertwined
You Cannot Hide From Risk
All You Can Do Is Manage Risk Down To Manageable Levels
Risk Management Is A Simple Matter of Assessing/Analysing Data Points
Risk Framework• Needs Assessment - The Purpose
• Expected Outcome - The Result
• Horizon - Time Element
• Appetite to Loose & Absorb Shocks - Risk Appetite
• Ability to Manage Risk - Strategies
• Available Cash
Varying Objectives?• Individuals
• Life Events: Education, Marriage, Housing, Retirement• Corporate
• Manage surplus cash, even our cash flow cycles, growth, taxation
• Bank
• Manage cash flow mismatches between deposits, withdrawals, lending, defaults, growth, taxation
• Insurance
• Risk Events, Cash flow mismatches, growth
Varying Needs Analysis• Regardless of the Investor Type the measures are identical• What differs is the Analysis of the Need• For Individual Investors the cycle begins with a Risk Assessment Questionnaire (Why,
When, etc)• For Corporates it depends on their Business Plans• For Banks it depends on ALM• For General Insurance Companies it depends on
• Risk Events• Actuarial Calculations
• For Life & Pension Companies• Risk Events (death, disability, medical conditions, retirement)• Risk Assessments in case of Investment Backed or Unit Linked Plans
IndividualsIncome Group Sources Horizon Appetite Avenues Returns % Share
Low Wages Short Low BanksInsurance
FixedVariable
60%40%
Medium Wages Intermediate MediumBanksInsuranceMF’s
FixedVariable
Markets
40%30%
30%
High WagesBusiness Long High Varied
FixedVariableInsuranceMarketsHedges
PE
20%20%30%20%
10%
CorporateSize Surplus Horizon Appetite Avenues Returns % Share
Small Low Temporary Low Banks FixedVariable
60%40%
Medium Medium Intermediate Medium
BanksMF’sTreasuriesICD’sFamily Offices
FixedVariable
Markets
40%30%
30%
Large High Long High AllFixedVariableMarkets
Hedges
20%20%30%
30%
Financial Institutions
Size Surplus Horizon Appetite Avenues Returns % Share
Small Low Temporary Low Banks FixedVariable
60%40%
Medium Medium Intermediate MediumBanksMF’sTreasuries
FixedVariable
Markets
40%30%
30%
Large High Long High AllFixedVariableMarkets
Hedges
20%20%30%
30%
Risk Types
• Market Risk
• Operational Risk• Systemic Risk
Analytics• Is largely dependent on various factors
• History - Hindsight is a great thing - (BUT The Bullet has been fired)
• Future Prospects - Predictions have DEPENDENCIES (Variables)
• Guesswork - Probability (LACK of Certainty)
• Triggers - Events (we usually have little or no control)
• Availability - QUALITY Data (Sources, Cleanliness, Quantum)
• Methods, Techniques, Tools - Collection, Processing & Interpretation
Risk Frameworks
• There are frameworks• There are no global agreements• If there are agreements, they are debated
to death in the event of failures• We are only as good as our last predictions
Asset Classes & Their Nature
Equity Shares• Usually Considered to be High Risk
• Investor Types• Buy & Hold vs Dividend Stripping• Market Investors - (Price Appreciation)• Valuations - Driven by Market Perceptions• Outstanding Shares• Trading Volumes• Follow herd mentality• Informed sources close to the management• Times EPS - (How Many Times)• By what factor• There is not a single yardstick
Interest Bearing• Considered to be Low Risk• Subject to Ratings• Sanctity of Ratings• Rating Agency Advisories are Conflicting• Rating Agencies depend on Data Points
Contracts• Derivatives & Futures
• Are actually SIMPLE to Understand• They depend on an Underlying Instrument (or Basket)• They were created as a means to safeguard physical deliveries of an
underlying at predetermined rates/prices• However, they are Seldom held till expiry• The complexities arise from
• End Use• Lack of Standardised Pricing Models• Traders usually have a pet Quant who works off complicated Excels• And no Quant agrees with the other
Contracts
• Foreign Exchange
• Markets are driven by International Trade Flows
• Subject to Government Intervention• Easily swayed by unscrupulous Traders
Commodities
• Depend on Acts of God
• Discoveries
• Extraction Methods
Real Estate
• Considered one of the safe investment avenues
• Subject to Infra
• Usually considered to be illiquid
Metals & Crude• Gold
• Indian housewives hold 11% of the world's gold. That is more than the reserves of the USA, the IMF, Switzerland, and Germany put together
• Earlier a country’s currency was valued in terms of its gold reserves• The Gold Standard was abandoned• This led to the advent of deficit financing
• Silver
• Platinum
• Copper
• Oil
• That can quickly change, as alternative energy technologies do exist, its just a matter of time until Black Gold looses its lustre
Alternate Asset Classes
• MBS• ABS• Strips• Exotics• Digitals• Structures
Invisible Cash Flows
• Arms
• Drugs
• Though illegal the income from these make it into mainstream investing
Investment Scenarios• Scenario Analysis - What If?
• Show Me The Money
• Money is like WATER
• It finds its own LEVEL
• It usually flows to where Money ALREADY exists
• Few take a Contrarian View
• The TREND is your FRIEND
• FOLLOW the TREND
Ever Heard of the 80:20 Rule?
Well here it is
80% of Investors have to LOOSE for the 20% to GAIN
This is called The SMART MONEY
They are SMART ‘cause they have what 80% DON’T
DATA
So Let’s Talk About DATA ANALYTICS
• It deals with Histories• It seeks to PREDICT basis the PAST• History does’t always repeat itself• It means throwing several variables into the MIX• One of the biggest variables is The CYCLIC NATURE of market
movements• It must predict when Cycles begin and End• There are Macro Cycles and Micro Cycles (wheels within
wheels)• There are ALWAYS LEAD and LAG Indicators
Data Quality• Data comes from various sources• Its usually delayed• To clean Data various interpolation
techniques have to be applied• Log Linear• Cubic Spline
Data Sources• Data comes from various sources
• Markets - Prices• Governments - Economic• Agencies - Feeds
• Its usually delayed• To clean Data various interpolation techniques have to be
applied• Log Linear• Cubic Spline
Analytical Challenges• Cross Referencing
• Feed Delays pose challenges• Conflicting Data Sets need careful analysis
• Interpretation needs to be led by Humans• Humans are usually subjective
• Algorithms are written by Humans• Self Learning & AI are the new buzz words, BUT their accuracy
will take time to establish• We will get it all wrong before we get it right
So Do We need Analytics
• Unequivocally - YES
• What we need is - Standardisation
• We need Global and Regional Models
• What works for the Advanced Economies Doesn't necessarily work for the LDC’s
Decision Support• Decision Support Systems are nothing but Algorithms
• Collect Data• Clean Data• Query Data• Fetch Data• Run Algorithm factoring in Variables we referenced earlier• Publish on Screen or via Report• Run various scenarios by changing around a few variables• And Finally, in the face of a plethora of information taking a
decision
Risk Mitigation
Technical Analysis• Prices• Volumes• Trends• Cycles
• Macro• Micro
• Indicators• Strategies
Strategies• The Long & Short of It All
• Taking Long Positions• Taking Short Positions
• Naked vs Covered• Alternating Long & Short within Cycles
• Butterflies• Long Butterfly• Short Butterfly
• Straddles• Strangles• Combining Holdings & Derivatives
Tools• MACD
• Day Moving Average• Signal• Crossover
• Japanese Candlesticks• Fibonacci Numbers• Finally its all about PATTERNS & CYCLES (My favourite is a Double Top Followed by a
Double Bottom)• Thought to be PURE in terms of indication of market movements• Markets are moved by Money Flows• Money Flows are controlled by People• So, someone makes the first move and the Markets follow• That SOMEONE is the SMART MONEY (the 20%)
Fundamental Analysis• Balance Sheet Analysis
• Key Financial Ratios• Past Performance• Future Prospects• Sector Analysis• Industry Analysis• Competitor Analysis• Technology Obsolescence & Ever-greening • Distribution Framework• Capital Adequacy• Management Track Record
Hybrid Analysis
• Combine Fundamentals & Technicals• Base macro decisions on Fundamentals• Base Entry & Exit on Technicals• Use the Snake in the Tunnel Technique
Tips & Tricks• DON’T take a NAKED Short unless you have money to throw• Market Tops & Bottoms are predicted by FOOLS or GENIUSES• One Prediction does not a Guru Make• Analyse, Analyse, Analyse• Pick an Investment Strategy based on your Risk Appetite• Stick with your Strategy, give it time• If you’ve picked a good stock, don’t panic at the first downturn• Cut Your Losses, Let your Profits Run• Book Profits periodically, you’re bound to run afoul of the Trend at some
time• TRY (hard) not to average a loosing position
Manage Your Portfolio
Models• Build a Risk Based Model• Models can be as Generic or Specific as You like• Balance your Risk/Model• Hedge your Bets• Do Dry Runs BEFORE entering the Market• Play out your Hypothesis• Course Correct as You go• Don’t let EGO get in the way of your Investment Decisions• Finally, its about MAKING Money• Prudence and Balance are your FRIENDS, NOT Greed
Questions?
Comments?
Suggestions?
Contact
sumirnagar.com