Building an investment framework that shows what’s really driving the markets

Business challenge

In today’s financial markets, the distance between geographies continues to shrink, while asset classes continue to become ever more interconnected. Add to this the rapid increase in available data, and the result is rising financial market complexity that makes alpha generation more challenging for asset managers and traders.

In 2014, research firm Quant Insight (QI) developed a strategy for estimating fair value of securities based on macro factors. QI recognised that to create an attractive solution for the market, it needed to be able to pull together information from a wide variety of sources, involving a huge volume of data and running complex quantitative algorithms, which would need to be managed by a powerful technology platform.

QI knew that to develop such a complex framework would require specialist quantitative modelling capabilities that were beyond its core competencies. “Many projects at smaller companies and start-ups fail because they do not give themselves enough room for the unknown,” said QI CEO, Krishnan Sadasivam. “Firms often fail to incorporate any level of risk or uncertainty into their product development plans and do not adequately forecast the time, resources and skills required.”

For this reason, QI opted to seek external support to develop the framework, selecting The Smart Cube as its partner. QI’s senior management had worked with the company previously, and knew it had the ideal combination of analytical, engineering and quantitative modelling skills, plus the extensive financial services experience, required for the task.

The Smart Cube solution

Leveraging its Quant Analytics solution, The Smart Cube was involved in the project from the very beginning, starting by working alongside QI to carry out the research needed to build the quant framework around the strategy, and to gather sources for the large number of securities QI wanted to analyse.

Following initial conversations about the strategy, The Smart Cube team took control of the project, providing a single point of contact who not only understood the quant modelling requirements, but also the financial markets context, and the technology and application development needs. Nikhil Agarwal, The Smart Cube’s head of quant for QI, said: “On a project such as this, typically a firm would interact with an IT team that doesn’t have the expertise in quant modelling, making the process more difficult and risky.”

The research phase led to the conclusion that the solution should be an enriched web-based application, which would enable users to log in and review many different asset classes, their values and sensitivities. The Smart Cube provided a holistic solution, involving quant analysis, algorithm development and application build, as well as the underlying server and database technology.

The platform implementation required a diverse range of expertise, including solution architecture, database development and administration, user interface design, and network engineering. A team of five managed the implementation, and were rotated to leverage their diverse skill sets at different points in the project.

Results

• The Smart Cube delivered a valuation framework that helps to identify investment opportunities for QI’s clients. Large volumes of relevant macro and market data are updated continuously and over 4,000 instruments are scanned in real time. The largest valuation gaps are revealed throughout the day, and this analysis allows identification of opportunities that would most likely otherwise be missed.
• The Smart Cube has brought together modelling techniques and technologies to provide unprecedented insights into the valuations of market securities and the underlying dynamics of financial markets. The combination of data science, mathematics, domain expertise and processing power now allows QI to derive precise answers to the most fundamental questions in financial market investing, including:
  • Given available information, what is the objective valuation of a market security?
  • What drives the price?
  • Where are the largest valuation gaps and trade opportunities?
• Increased QI’s coverage of financial markets, encompassing equity indices and single stocks, currencies, rates, commodities, credit and volatility markets. Both directional and relative value approaches are included, as are emerging markets.
• Analytics are easily accessible over the web, and through regular reports and live notifications across the day.

Value delivered

• The Smart Cube’s combination of quant knowledge and IT expertise is cited by QI as a critical advantage. Sadasivam explains: “The Smart Cube understands what I am thinking and what I am trying to achieve thanks to a good working relationship and a team with extensive experience in quant modelling. I think of The Smart Cube as a partner, not as a supplier.”
• By working with The Smart Cube, QI freed up its in-house analyst team to focus on businesscritical tasks, such as enhancing coverage, expanding the scope of research and analytics, and increasing time spent in the market.

“As a company, we needed flexibility,” said Sadasivam. “Instead of hiring four to six people in-house and hoping they’d work out, external resources and skills were deployed seamlessly when needed, so partnering provided that flexibility. No one knows exactly how many people and what type of skills are required when starting out on a project such as this, but with The Smart Cube, we were able to call on the financial, quantitative and strategic resources of its hundreds of analysts as and when required.”

“Ultimately, The Smart Cube has created a comprehensive solution to understand what’s really driving the markets, encompassing both equity indices and single stocks, currencies, rates, commodities, credit and volatility markets, which enables us to help our clients make profitable trades.”

About QI

QI offers online access to quantitative analysis through its proprietary model, updated every 15 minutes to give traders, portfolio managers or risk managers, a quant’s-eye view of the main drivers of pricing in specific assets and model valuations – providing facts rather than subjective opinion.

The Head of Trading of a $3.8 billion US hedge fund is an enthusiastic QI customer: “QI allows us to say ‘We think inflation expectations are going up; what is the best way to play that?’ And it might be something you wouldn’t expect. It’s opened our eyes to looking at different ways to play thematic trades.”