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Humans vs Robots: Which Is Better for Managing Investments?

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Humans vs Robots: Which Is Better for Managing Investments? 1

By Anton Altement, CEO of Polybius and OSOM Finance,

In an era of technological advancement, innovation, and fear-mongering sci-fi programs, fears over a robot uprising and artificial intelligence coup are rife. While these two hyperbolic scenarios are likely a while off, trading bots used within financial dealing are starting to supersede their human researcher counterparts. On Wall Street, these infallible and emotionally-neutral trading automatons are gathering acclaim. And some propose that they’re going to change the face of finance forever.

Let’s face it, not many humans are cold-blooded and rational enough, which are essential qualities for long-term trading success. This means those few strong traders can ask for high fees for their services, which are often completely unpalatable for a small investor. Robo-advisors, on the other hand, do away with this hubris, epitomising financial inclusion and cost-efficiency. Moreover, they are much more scalable than a human trader, with the ability to trade multiple markets at once.

Major commercial banks are the first to see the potential in these robo researchers. In 2019, multinational investment bank Goldman Sachs announced its own robo-advisory service. While the launch is postponed until next year due to coronavirus-based disruption, the market for robo advisors is still booming, with trading bot usage has grown between 50% and 300% from December 2019 to January 2020.

Why? Because unlike human traders, robots aren’t restricted by the primal urges of the reptilian brain.

A Quantitative Solution to Irrationality

There are few triggers more powerful in electing an emotional response than money, power, and greed. Our internal struggle to satisfy any one of these desires can set us on a disastrous course for failure—particularly when it comes to trading. The fear of missing out, loss aversion, and even hubris present major obstacles for traders to overcome. And, historically, we have very little success in doing so.

There are a few techniques at a trader’s disposal when it comes to evaluating entry and exit points for a trade. For the most part, they can be categorised into two distinct approaches: qualitative and quantitative analysis.

A qualitative approach involves in-depth data analysis pertaining to subjective information, such as company management, earnings, and competitive advantage.

Quantitative analysis, meanwhile, examines the statistical attributes of an asset, including performance, liquidity, market cap, and volatility. For the data-driven cryptocurrency market, with its swathe of exchanges and bounty of information (total supply, transaction volumes, fees, and mining metrics, etc.), it’s the latter quantitative approach that is often favored.

This is reflected by the 2020 PwC–Elwood Crypto Hedge Fund Report, which details that nearly half of all crypto fund managers (48%) opt for a quantitative trading strategy. And there’s one clear reason as to why. A quantitative approach—in the main—aims to neutralise cognitive bias.

Still, try as they might, no human is capable of totally ignoring their primal instincts. And that can prove troublesome.

In a study into emotional reactivity on trading performance, researchers of the MIT Sloan School of Management found that excessive emotional responses can be extremely detrimental to trader returns, particularly during times of crisis and within high volatile markets.

But where humans fall down, the novel trading bot thrives.

The Rise of the Robo Advisor

Trading bots are much more nuanced than their all-encompassing moniker would suggest. These bots come in many different varieties. Two of the most common are the analyst and advisor bots. The latter advisors build portfolios based on the client’s risk profile. Robo analysts, meanwhile, probe data released in annual company records, as well as SEC filings, to provide buy and sell recommendations.

Despite their varying traits, both benefit from negating the cognitive biases inherent in human researchers, analysts, and traders.

As such, within volatile and high-pressure market conditions, trading bots have proven to surpass the performance of their human equivalents.

A 2019 study from Indiana University appraised over 76,000 research reports published over 15 years from various robo-analysts. Researchers found that the robo buy recommendations conferred 5% better returns than those of the human analysts.

But while bots may have the edge over humans, their results vary wildly when competing amongst themselves.

Between May 2019 and March 2020, researchers pitted 20 German B2C robo-advisors against each other, measuring their performance and calculating the differences. The variation among the bots was enormous. But most impressive of all was the bot that came in pole position. The top robo advisor managed to restrain losses to just -3.8%, beating the other bots by around 14 basis points. And decimating traditional hedge funds who were down approximately -10% across the board following March’s tumultuous marketwide crash.

As it turns out, the main difference between the top robo performer and the rest was its unique strategy. The robo advisor not only used quantitative analysis, but it leveraged the irrationality of the market to its advantage—measuring conventional risk metrics, such as loss aversion bias and recovery time, to ascertain illogical trades and position itself on the other side. In doing so, it was able to interpret the market better than both the determinedly quantitative-based bots and the human-operated hedge funds.

Investing

Stocks slip from highs; investors wait on Fed

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Stocks slip from highs; investors wait on Fed 2

By Matt Scuffham

NEW YORK (Reuters) – Global stocks slipped from record levels on Tuesday, with investors cautious as the Federal Reserve kicked off its two-day policy meeting and U.S. lawmakers continued to debate a new stimulus plan.

Those concerns overshadowed impressive results from a slew of companies, including from General Electric and Johnson & Johnson, which had earlier pushed the S&P 500 to a record high.

“Investors don’t expect the Fed to give any reason to think they are getting closer to talking about when they will consider scaling back QE, but nervousness is brewing on Wall Street,” said Edward Moya, senior market analyst at OANDA in New York.

Wall Street’s main indexes closed lower.

The Dow Jones Industrial Average fell 22.96 points, or 0.07%, to 30,937.04, the S&P 500 lost 5.74 points, or 0.15%, to 3,849.62 and the Nasdaq Composite dropped 9.93 points, or 0.07%, to 13,626.07.

The MSCI world equity index, which tracks shares in 49 nations, fell 1.99 points or 0.3%, to 666.09.

After a “buy everything” rally over several months supported by money-printing pandemic stimulus packages, near-zero interest rates and the start of COVID-19 vaccination programs, some investors are worried markets may be near “bubble” territory.

They point to rocketing prices of assets such as bitcoin or the soaring stock of short-squeezed videogame retailer GameStop.

“There is room for some consolidation,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

Uncertainty over the timing and size of fiscal stimulus also tempered sentiment.

Disagreements have meant months of indecision in the United States, where new coronavirus cases have been above 175,000 a day and millions of people are out of work.

Democrats in the U.S. Senate will act alone to approve a fresh round of stimulus if Republicans do not support the measure, Majority Leader Chuck Schumer said.

U.S. Treasury yields were narrowly mixed in choppy trading, after hitting three-week lows on the long end of the curve, as investors remained cautious about the stimulus and the slow global roll-out of coronavirus vaccines.

Benchmark 10-year notes last rose 2/32 in price to yield 1.0347%.

The U.S. dollar edged lower across the board as traders showed a preference for riskier currencies.

The dollar index fell 0.2%, with the euro up 0.21% to $1.2162.

European stocks advanced, shrugging off political upheaval in Italy, as strong earnings from wealth manager UBS and auto parts maker Autoliv added to a string of upbeat corporate updates.

The pan-European STOXX 600 index closed up 0.6%, with a rally in automakers, industrial companies and SAP helping the German DAX outperform.

Europe’s broad FTSEurofirst 300 index added 0.64%, at 1,573.47.

The IMF raised its forecast for global economic growth in 2021 and said the coronavirus-triggered downturn in 2020 would be nearly a full percentage point less severe than expected.

Italy’s FTSE MIB rose 1.2% after Prime Minister Giuseppe Conte handed in his resignation to the head of state, hoping he would be given an opportunity to put together a new coalition and rebuild his parliamentary majority.1.2163

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 11.47 points or 1.58% in Asia overnight. South Korea and Hong Kong topped losers, each falling more than 2%. The sell-off also caused Japanese stocks to slip 1% and Chinese blue-chips to tumble 2%, their biggest one-day loss since Sept. 9.

All had touched milestone highs earlier this month.

Gold prices edged lower. Spot gold dropped 0.2% to $1,850.63 an ounce. U.S. gold futures settled down 0.2% at $1,850.90.

U.S. crude oil futures settled at $52.61 a barrel, down 16 cents or 0.30%. Brent crude futures settled at $55.91 a barrel, up 3 cents or 0.05%.

(Reporting by Matt Scuffham; Editing by Dan Grebler, Mark Heinrich and Sonya Hepinstall)

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Current cryptocurrencies unlikely to last, Bank of England governor says

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Current cryptocurrencies unlikely to last, Bank of England governor says 3

By David Milliken

LONDON (Reuters) – No existing cryptocurrency has a structure that is likely to allow it to work as a means of payment over the long term, Bank of England Governor Andrew Bailey told an online forum hosted by the Davos-based World Economic Forum on Monday.

“Have we landed on what I would call the design, governance and arrangements for what I might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think cryptocurrencies as originally formulated are it,” he said.

Bitcoin, the best-known cryptocurrency, hit a record high of $42,000 on Jan. 8 and sank as low as $28,800 last week, far greater volatility than is found with normal currencies.

“The whole question of people having assurance that their payments will be made in something with stable value … ultimately links bank to what we call fiat currency, which has a link to the state,” Bailey said.

The BoE, like the European Central Bank, is looking at the feasibility of issuing its own digital currency. This would allow people to make sterling electronic payments without involving banks, as is currently possible with banknotes, and would in theory help avoid the volatility that renders bitcoin impractical for commerce.

Bailey said the appropriate level of privacy for digital currencies was likely to be hotly debated and was potentially underrated as a challenge in setting one up.

“This is a big one that is coming on to the landscape, the whole question of a privacy standard for transactions made in any form of digital currency, and where the public interest lies,” he said.

(Reporting by David Milliken, editing by Tom Wilson and Alistair Smout)

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EU sustainable investment rules need better corporate data – banking report

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EU sustainable investment rules need better corporate data - banking report 4

By Simon Jessop and Kate Abnett

LONDON (Reuters) – European Union rules aimed at defining sustainable investments should help reduce “greenwashing” by businesses, but better quality corporate data is needed to ensure they work effectively, a banking report said on Tuesday.

The sustainable finance rules will classify investments that can be marketed as sustainable, a move aimed at steering much-needed cash into low-carbon projects to deliver the bloc’s climate goals.

From January to August 2020, 26 of the region’s biggest lenders tested the EU framework across a range of core banking processes, including retail banking, trade finance and lending to smaller companies.

As the main providers of finance to companies across the EU, the ability of the banking system to track and report on whether corporate activities are sustainable or not could prove crucial in assessing the rules’ success or otherwise.

The lenders broadly welcomed the regulations as they seek to align their businesses with the transition to a low-carbon economy, the report by the United Nations Environment Programme Finance Initiative and the European Banking Federation found.

However, they also raised a number of issues, many of which were data-related and could require a phasing in of reporting requirements.

While many large companies are already required to disclose certain environmental and social information by law, the bulk of smaller and mid-sized banking clients are not, hampering banks’ assessment of their alignment with the rules.

Concerns over the quality, detail and standardisation of data is also an issue when looking at banks’ lending overseas, something that would be made more complex as other regions launch their own regulations.

The banks who tested the EU rules called on regulators to seek global alignment of regulations, and for better tools to manage data from clients, such as a centralised EU database.

While under no compulsion to lend to activities that can be classed as sustainable, banks see sustainable finance as a growth area that is likely to take on more importance in coming years should policymakers tighten environmental legislation.

With more investors globally looking to become shareholders of companies with a good record on managing environmental risk, banks are also likely to look to reduce their exposure to environmentally or socially harmful activities over time.

The European Commission is expected to finish the section of the rules covering climate change in the coming months, before they take effect in 2022.

(Reporting by Simon Jessop and Kate Abnett; Editing by Pravin Char)

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