Rodrigo Marques, CEO of Atlas Quantum
We have a simple mission at Atlas Quantum: to help the world build wealth through cryptocurrencies. We believe that the strategies usually reserved for wealthy individuals and large institutional investors should be available to everyone. That’s why we built a platform that combines the power of smart algorithms, sophisticated trading strategies and the decentralized nature of new digital currencies like Bitcoin.
Of course, it can be daunting for any new investor to get started — especially when it comes to a new asset class like cryptocurrencies. We’ve spent a lot of time early on, educating people on the market and the technology behind it. But one question we’re often asked by those new to crypto is: what role should these assets be playing in a balanced portfolio?
It’s an important question — so to answer it best, let’s break it down to the key component parts.
There are plenty of reasons to choose crypto, from the transparent and democratic nature of crypto, to the important role crypto could play in truly democratizing the financial markets globally. And of course, chances are at least one of your friends has talked about investing in the space.
But perhaps most importantly, it’s now rapidly gaining mainstream acceptance as an asset class. We spoke to Bitcoinist just last month about how significant regulatory ‘u-turns’ in a number of regions suggests that mainstream acceptance for crypto is not far away. And of course, cryptocurrencies are no standard asset class — so they’ll bring new opportunities for all sorts of investor types.
Finding balance and playing the long game
That word ‘balance’ is key. For even the most conservative, passive investor, there’s a lot to be said for the role of cryptocurrencies in your portfolio. While opinions still vary, sentiment does increasingly suggest that the crypto asset class is a positive ‘bull market’ in the long term, with valuations likely to increase as regulatory clarity improves and institutional investors get involved.
Whether you’re new to investing or not, the importance of diversification is unsurprising and easy to grasp. It’s a simple but effective way to lower the risks of investing, ensuring your profits — or losses — are never tied to one single type of asset or strategy. A diversified portfolio is a stable portfolio. And of course, for those specializing in cryptocurrencies, diversification can be applied within an asset class, too. As CoinCentral outlined recently, crypto specialist investors could consider investing across crypto assets with large, medium and smaller market caps, in order to build a diversified crypto portfolio.
What does that mean for you? Whatever type of portfolio you’re building, there’s a role for crypto to play. Even if you intend to take the long-term ‘buy and hold’ approach with a traditional investment portfolio, a modest holding of cryptocurrencies might be worth considering.
Volatility and opportunity
Clearly there’s a role for cryptocurrencies to play in a passive investing strategy. But when you combine the conditions of the crypto market, with the sophistication of other classic trading strategies, things get really interesting.
That’s where a platform like Atlas Quantum comes in. Because while Bitcoin is bought and sold at various digital brokerages around the world, a range of differing market conditions mean that the price is often cheaper or more expensive in one market, compared with another. When you deploy a smart algorithm to continuously monitor for fluctuations between those exchanges, ready to take advantage of that ‘arbitrage’, you get a perfect storm of old and new financial investing. It’s an approach that’s already working well for our users, with the platform yielding an average monthly profit of 2–3%, in the first two years of operation (and 5.24% back in April).
So when it comes to investing in cryptocurrencies, don’t forget all the tried and tested techniques that can help you get started — and look out for smart ways to take advantage of volatility.
High yield value trap: party over for high yield bonds as risk no longer rewarded
High yield bonds are no longer rewarding duration and credit risk correctly, argues RWC Partners’ Justin Craib-Cox, and investors should consider using convertible bonds to earn equity-like returns as volatility continues to affect markets.
Following an initial widening, high yield bond spreads quickly tightened in the wake of the initial coronavirus crisis, despite signs that economies have a long way to go and there may be more stress to follow.
With high yield bonds offering under-appreciated risks in the current environment, investors should look elsewhere for debt that has equity-like returns according to Craib-Cox.
“Bond markets are at a turning point, where taking credit and duration risk will not be rewarded as it was in the past,” says Craib-Cox.
“High yield bonds have enjoyed very strong risk-adjusted returns in recent years. That is because the environment has been broadly supportive, thanks to low rates, minimal interest burdens and muted volatility of outcomes. And with investors in need of income and having to allocate more to high yield, it becomes a sort of circular arrangement.
“So why was this period so good for high yield? Simply put, massive monetary support from central banks pushed interest rates lower and dampened volatility, and those conditions helped to limit defaults in high yields while pushing bond prices higher.
“Plus, risk preferences and an aging global demographic created more demand for bonds, providing a steady bid for more speculative credit. In other words, the bet of loaning money to shaky companies worked fine in this period, given that high yield issuers were largely able to repay or refinance their debts.”
But where the market stands today in the ‘New Normal’ is clearly different, Craib-Cox believes.
“Asset price volatility has increased with the more uncertain future following the Covid-19 pandemic, even with rates staying low and governments pledging fiscal support. Corporate defaults, particularly in the US, have crept up even before the coronavirus crisis began.”
Speculative-grade corporate default rates
“The rapid spread of the pandemic caused a massive widening in credit spreads in March and April 2020, and a subsequent loss of capital for the sub-investment-grade bond market. As such, high yield does not look like a bargain anymore, with spreads recovering to pre-lockdown levels while the probability of defaults has plainly increased.”
“In a world of low rates and low volatility, issuers used the high yield markets with carefree abandon and no concern for extra leverage. Now that volatility and uncertainty have returned, simply adding another layer of debt to get through a rough patch doesn’t make as much sense.
“Overleveraged issuers are facing conditions vastly different to those they assumed when taking on debt, and investors accustomed to low defaults from this market are thinking again about exposure to this asset class.”
Craib-Cox argues investors in high yield bonds that have the flexibility to earn return through embedded equity options should consider convertibles, which have outperformed high yield this year.
Convertibles vs High Yield
“While high-yield bonds are a one-way bet that a speculative issuer will not default, the embedded option to convert gives positive returns if stocks rally, but limited downside thanks to a bond floor.
“These structural features helped convertibles to outperform high yield, both when markets sold off in early 2020, and during the rally that began in April 2020.”
“In fact, from the year’s lows, convertibles recovered to pre-lockdown levels more quickly than high yield, and as of the end of September, convertibles are positive for the year while high yield remains negative.
“Issuers too are now choosing to use convertibles, with a record amount of issuance in 2020. Convertibles are being issued by companies that may be the stronger operators in a temporarily challenged sector, or looking to finance growth prospects, particularly in sectors such as IT where the pandemic has created opportunities in areas such as distance working and learning.
“With less representation from highly leveraged or cyclical sectors, many investment grade or equivalent convertible bonds, and a growth aspect to many issuers, the sector composition of the convertible market is also quite different to high yield, with potential diversification for credit.”
Investing for Infrastructural Resilience
Today, the concept of resilience is applied in a range of contexts from ecology and disaster management to cyber security and engineering. The notion of resilience has been at the forefront of discussions around the global post-Covid-19 recovery and our collective efforts to build back better.
For impact investors, this means directing our capital allocation and stewardship activities towards solutions that can drive systems change and transformation. At Tribe, we divide our range of resilience-based investment opportunities into three categories: infrastructural, planetary and human resilience.
In this article, we focus on Infrastructural Resilience. The investments are designed to strengthen our man-made environment and improve its capacity to withstand the various potential social-ecological disruptions on the horizon.
Digital technology and software has the unique ability to support the delivery of all 17 UN Sustainable Development Goals (SDGs). Digital technologies increase our capacity to connect and communicate, supporting engagement with political, educational, healthcare, and other welfare-based systems.
Moreover, digital innovations like Artificial Intelligence (AI) enable us to monitor and understand with greater clarity the changes unfolding in the world around us, so that our responses can be more targeted and precise. The rise of smart, connected devices and big data capabilities allow us to analyse and optimise our resource use, bringing significant efficiency benefits. Digital technology and software are also a critical element of crisis management, as we have witnessed during the Covid-19 pandemic with the successful shift to remote working for many.
Our conventional modes of construction are set for reimagination as buildings currently account for roughly 39% of global energy-related carbon emissions as well as significant volumes of water and material consumption. Numerous initiatives have been developed to promote the delivery of resource efficient buildings and refurbishments.
Technologies like high performance insulation, natural ventilation and heat recovery systems, natural daylighting systems, greywater recycling and onsite renewable power generation, can be used to significantly reduce the operational resource footprint of buildings. Digital innovation also has a role to play in smart energy and water management systems which can drastically improve resource efficiency.
Buildings made from conventional building materials, like cement and concrete, also account for significant amounts of embodied carbon. A wide range of bio-based, renewable and recyclable materials show promise as alternative building materials, from bamboo to seaweed. These alternative materials are effective at locking in sequestered carbon and supporting biodiversity during their growth.
CLEAN AND RENEWABLE ENERGY & TRANSPORT
There are infrastructural shifts in support of renewable energy generation and low-carbon transportation which will be critical enablers of cross-sectoral decarbonisation, to bring us in line with the 1.5°C warming goal outlined in the Paris Climate Agreement.
Renewable energy generation allows us to move away from pollutive fossil fuels and instead power our lives and economies in a cleaner, more affordable way. Renewable energy sources continue to prove increasingly cost-effective and efficient across a range of technologies, including solar PV, onshore and offshore wind and geothermal power. Moreover, advances in battery energy storage and smart grid technologies show promise for improving efficiency and balancing out the intermittency issues inherent in harnessing natural elements like sunshine and wind.
The electrification of the transport sector is another essential infrastructural shift, and one that relies on affordable and reliable access to renewable power in order to deliver decarbonisation benefits alongside reductions in ambient air pollution. Innovations in vehicle-to-grid technology highlight the potential for electric vehicle batteries to help balance out power supply and demand while charging, which will enable the integration of more renewable power into the electricity grid. In addition to electrification, innovative fuels like green hydrogen could become feasible solutions for the decarbonisation of harder to abate transport sectors like shipping and aviation. Meanwhile, connected and autonomous vehicles could help to shift us towards a more efficient ride-sharing economy, while improving road safety and reducing air pollution.
This range of opportunities demonstrates the scope we have to truly build back better. Sourcing investments which drive change and improve efficiencies in our man-made environment is at the heart of our focus on Investing for Infrastructural Resilience
Humans vs Robots: Which Is Better for Managing Investments?
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.
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