Technology for digital core investment engines and automated portfolio health checks

Systematic diversification of portfolios is currently revolutionised. New technologies extract the interconnected relations between assets and markets in real-time and enhance diversification effectiveness. Portfolios are adaptively de-clustered and de-networked in order to increase diversification benefits. This strongly increases asset allocation efficiency and performance robustness of all kinds of capital market portfolios. Even customised portfolios can be arranged and risk monitored with a high degree of automation.

These new technologies are based on graph/network science making better use of noisy asset return time series, curing modern portfolio inefficiencies. They have already found their way to high-class academic journals like 'Journal of Portfolio Management' and 'Financial Markets and Portfolio Management'. Also they are currently getting strong traction in the financial industry. This was clear as any industry that started to use interconnected data analysis was sustainably revolutionised. We have more than a decade of experience in these technologies in practical asset&wealth management applications.

This new investment intelligence is used to dynamically construct tailored portfolios, for advanced risk management and reseach as well as for individual portfolio health checks immediately responding to market changes. Also, it is used to meet regulation and compliance. It is based on Advanced Analytics and Machine Learning for solutions in InvestTech, RiskTech and RegTech.

The network/graph approach is able to finally rationalise complex markets and decipher interconnected market relations. Network effects in portfolio diversification are the main drivers of performance as they represent systemic and tail risk in portfolios. Mapping and managing this interconnectedness is a low-assumption and thus very robust approach. Dangerous butterfly defects can be cured now and investment management can benefit from the 'network effect'.

Here is a network visualisation of an example ETF portfolio where we scale node size with portfolio weights:

Read more on network-based diversification here. Find our related industrial and academic publications here.

See a regularly updated use case in ETF portfolio management here.

The network/graph approach is a scientific, systematic and robust concept. Also, the relations between markets can be visualised in order to get intuition about market changes and opportunities. Also, algorithmic decison making can be made transparent to get human intuition on the functioning of the underlying technology. Network science gives us a visualised map of the interconnectedness in each portfolio and investment universe. This amplifies human investment intelligence in bionic approaches where man and machine work together in a smart way. These technologies offer asset&wealth managers more accessible language and visualisation of complex market situations to communicate their activities to asset owners.

Algorithmic extraction of the underlying nested structure of assets within the portfolio with white bubble size scaling with portfolio weight:

Due to its robustness it can also be highly automated to offer machine based portfolio construction and risk monitoring. This enables digital solutions for advisors and also safe investment environments for self-empowered clients ('high-touch', 'high-tech'). New and meaningful signals and alerts can be transmitted to clients via digital channels in case there are unhealthy constellations in their portfolios. There are real-time, client-triggered automated portfolio checks and automated suggestions to fix and cure the butterfly defect. This is to respond quicker to market changes and to build stronger client relationships.

The potential of these new technologies in digital asset&wealth management is huge. This is because the technology helps to rationalise complex financial markets. Completely new investment products, services and client applications can be offered, fully embracing the potential of digital business models. Products, solutions and services are highly customised to clients with very fast response times. Investment managers and self-activated clients now have access to new meaningful stress tests and scenario analyses based on the network/graph technology.

Network-/graph-powered investment processes and risk management is systematic, repeatable, scientific and robust. At the same time it is cost-effective and can be documented. Also, regulatory requirements and compliance issues are addressed by the technology and there are numerous capabilities for reporting and explaining the underlying forces in portfolios to all stake holders.

New products, solutions and services based on the technology:

  1. investment products
  2. indices and benchmark portfolios
  3. network risk overlays
  4. digital services for risk management, regulation and compliance
  5. advisory and research tools
  6. enhanced analytics, investment processes, risk management and reporting
  7. client value applications like automated real-time health checks and portfolio recommendations
  8. data and information business: delivering maps to rationalise complex financial markets

Read more on network-based diversification here. Find our related industrial and academic publications here.

See a regularly updated use case in ETF portfolio management here.

Contact us for more information and discussion here:

+49 6171 999 5966 (landline)
+49 174 143 5555 (mobile)
jp @ firamis de (e-mail)