Fintech: Coaching for asset managers

By:
Peter Lee
Published on:

By identifying and managing unconscious behavioural biases, Essentia Analytics aims to help portfolio managers make more money for their clients.

A lot of excitement over the potential for fintech to transform the capital markets focuses on its adoption by banks and the sell side.

Rather fewer fintech firms are selling to the buy side, even though much of what asset managers do relates to the capture, structuring and analysis of data, and this is what next-generation financial technology is supposed to be particularly good at.

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Clare Flynn Levy,
Essentia Analytics

“It’s a little strange that when their investment process is essentially what they are selling, asset managers don’t make more use of data to analyze retrospectively the decisions that contribute to the performance they deliver to clients,” says Clare Flynn Levy, founder and chief executive of Essentia Analytics.

Essentia Analytics is a provider of software that analyzes the behaviour patterns that drive portfolio managers’ decision-making that also seeks to coach them to control behaviours that damage performance and promote behaviours that add value.

The company takes data on asset managers’ trades and holdings, adds in the subjective notes that portfolio managers often make as to their conviction levels when they trade but that never make it into the hard trade, and position data – and then seeks to understand it all in the context of what is going on in markets when those decisions are taken.

A fund manager might want approval to put on high conviction trades, but is his conviction only high when the price is going up and does he tend to put on positions only when most of the value is gone? In an industry of colossal egos comparable to investment banking, it takes a brave asset manager to ask this.

“We all have habits and biases that may cause us to do irrational things, and we are rarely conscious of how emotion drives us to certain decisions,” says Flynn Levy. “But investment is a skill. Like any skill it can be coached and improved. Doing that requires data.” 


We have one fund manager who had a tendency to hold losses too long and since we have been sending him nudges about this that has directly resulted in him saving $1 million for his clients 
 - Clare Flynn Levy, Essentia Analytics

Most of the behaviour that damages investor performance is familiar. Asset managers might be slow to act on high conviction ideas; they might hold on too long to losing positions or cut winners too early; they might over-trade or chase momentum and so end up buying at the top.

The simple concept behind Essentia Analytics is that the data to analyze these decisions and behaviours are already at most investors’ finger tips but they don’t use them.

“We can literally ping fund managers an email: ‘The data suggests you may be over-trading again, or you’re running this loss too long.’ We can remind them,” says Flynn Levy. “Most fund managers have a vague sense of these behaviours, but we can show it to them in the hard data.”

Essentia Analytics is working at 13 institutional asset managers ranging from hedge funds to traditional long-only money managers, with asset allocation and equity portfolio decision makers.

“They tend to be ones that care a lot about investment process as well as investment performance, that have longer-term horizons and are open-minded to recognizing there may be things they are getting wrong or could do better,” says Flynn Levy.

“We also aim to pull apart all the decisions fund managers take and identify which decisions they actually add value through and which they don’t with the idea to help them concentrate on making fewer decisions but better ones.”

She adds: “For example, we worked with one fund manager who appeared too slow to put on high conviction trades and it turned out the obstacle was really in the whole approvals workflow process that led up to sending an order. That’s something we can show to the CIO and that might have an impact across the whole firm.”

Osmosis

Flynn Levy spent 10 years as a fund manager running more than $1 billion of pension funds for Deutsche Asset Management before becoming founder and CIO of hedge fund Avocet Capital Management, a specialist tech fund manager. She went into invest tech as president of Beauchamp Financial Technology, a provider of portfolio management systems to hedge funds.

Flynn Levy understood early that most fund managers are meant to learn their trade by a process of osmosis from sitting at the feet of experienced star managers. She now sees a role for the specialist coach.

“We have one fund manager who had a tendency to hold losses too long and since we have been sending him nudges about this that has directly resulted in him saving $1 million for his clients,” Flynn Levy says.

“Anywhere people are making a lot of decisions with a clear data footprint you can now provide this type of analysis.”