Malaysian Investors Turn to Analytics for Alpha Generation

HedgeSPA, a predictive investment analytics platform provider to hedge funds and other financial institutions, is seeing higher demand from firms based in Malaysia, driven by the increased probability of meeting target returns using analytics.

The company, founded in 2011 by former BlackRock managing director Bernard Lee, is currently working on pilot implementations at leading institutions in Malaysia. It also has received commitments from ultra-high-net-worth Malaysian investors interested in its index products.

Lee says other drivers fuelling demand for the platform include “rocket science” to limit potential losses, and meeting return targets promised to investors or asset-liability management goals set by regulators. The vendor provides the capabilities of a core investment platform via the cloud as a software-as-a-service solution. 

It uses artificial intelligence and big data to simulate all possible combinations of fundamental and economic factors from all available sources. “We then merge them with state-of-the-art techniques taken from systematic managers such as tail-risk enhanced drawdown control, and the machine can learn and correct its own predictions errors,” he says.

This process results in portfolios with steady upside and superior draw down characteristics, allowing institutional investors with analytical tools to construct and rebalance portfolios for volatile post-crisis markets.

Users of the platform will be able to set parameters and then get summaries of performance metrics against portfolio benchmarks, best case and worst case scenarios, top asset class and asset recommendations, and top environmental, social and governance (ESG) concerns with the portfolio, among others. Lee says that HedgeSPA has also been approached for other customized solutions such as asset-liability management on large balance sheets.

Danny Wong, chief executive of fund manager Areca Capital sees the trend moving towards using more artificial intelligence (AI) to help with analytics, given the vast nature of the stocks on offer in the region for trading. “Just on Bursa Malaysia alone, there are about 900 counters. If you venture overseas there are even more. So I think the trend is moving towards AI to analyze a list of stocks, for example, before the actual human touch,” he says.

Areca uses two third party vendors to help with this process. Once there is a narrowed down list of stocks of certain criteria, such as dividend yield, then the fund managers will look into secondary research from respective brokerage houses and conduct qualitative analysis on individual stocks before selecting them.

However, another fund manager of an international full-service asset management group with operations in Malaysia said he does not use analytics to help with generating more alpha. “We are not using any analytics here, though I am sure at the group level we might be. We focus on the fundamentals here,” he says.

Separately, restrictions by regulators on trading the ringgit make it extremely challenging to apply standard techniques and asset classes to meet those goals, HedgeSPA’s Lee added.

Earlier this August, Malaysia’s central bank— Bank Negara—lashed out at the Singapore Exchange and the Intercontinental Exchange after the bourses introduced ringgit futures on their exchanges. In a statement, Bank Negara said the ringgit is a non-internationalized currency and thus, the offshore trading of the ringgit is against the country’s policy. However, central bank governor Muhammad Ibrahim later said the statement only applies to market players in Malaysia.

These restrictions impose a burden on large asset managers, pension funds or insurers that have to produce certain target returns.

“For a Malaysian institution who has to meet similar challenges while keeping most if not all of their assets in ringgit, they will need all the help available including the best analytics tools,” says Lee. “As any private banker will tell you, getting six to eight percent of absolute return per year without using leverage is a non-trivial challenge, even for global investors with full access to multi-asset class investments including bonds, global equities, commodities, and alternatives.”

Areca Capital’s Wong says this does not really pose a challenge for the fund manager because it is a local company. He adds that under the country’s regulations for its fund-management industry, 50 percent of a company’s assets must be in Malaysia and the other 50 percent is allowed to be offshore.

“Most of our investments are local and we are able to diversify a little. Prior to the capital control, it was open, then they restricted it to 30 percent of offshore assets and now this has been increased to 50 percent,” he says.