AI Insights

Once Upon a Time

by Plotinus Plotinus No Comments

The power of narrative should never be underestimated. Humans it would appear have been story tellers and story listeners since time in memoriam. Myths have a deep role in our societies with a function in maintaining the structures of the society from which they emanate. It is important not to erroneously assume, when we look at the technological advancement that surrounds us, that our current era is too sophisticated for, or susceptible to contemporary myth.

The tumult of the retail investor rebellion is a case in point. There was market volatility and pain a plenty, as the short squeeze took hold in the last week of January. That said, it is perhaps an appropriate moment to distill the myth, if possible.

Let us go back in time to the hero of Sherwood Forest, whose namesake platform has been front-and-center of the retail-investor rebellion. The first thing to note is that the very myth itself has been shaped and molded over time to meet societal needs. In the more mature versions of the story that advanced into literature from the spoken word, the original English folkloric hero morphed from a dispossessed landed commoner to a dispossessed nobleman: Sir Robin of Locksley—aka Robin Hood (due to the mediaeval Machiavellian politics of the day). Such a dramatic elevation in social status alone should illustrate the need for caution when subscribing to belief in myth. Skipping past all the tales of chivalrous, do-goodery (robbing from the rich and giving to the poor), the message of the Sir Robin of Locksley version was very clear—maintain the status quo. There was nothing “wrong” with brutal feudal inequality per say, but rather that brutal inequality could be administered without additional excess cruelty. Furthermore, the myth contains a restorative element of returning the “good” nobility to their rightful place to replace the “bad” nobility who had usurped them. This was not—to be clear—a proto-Marxist revolution for peasant self-determination. After all, there was nothing wrong with the deep systemic inequality of feudalism—just in how it was administered.

Few appear able to analyze the myth and look at what the democratization of knowledge and media has meant in real terms.

So what of our contemporary myth now-dubbed the retail investor rebellion? Much has been heralded of the little guy who takes on Wall Street, representing the democratization of finance. With much of the same verve of the disruptor’s credo, we have democratized knowledge with the internet era, we have democratized media with the social media era, now onward ho! Let’s democratize finance!

Few appear able to analyze the myth and look at what the democratization of knowledge and media has meant in real terms—feudal levels of inequality achieved under the banner of “societal good”—to which Sir Robin of Locksley might say, “Bravo!”

There is nothing to indicate that the democratization of finance should be any different. The armies and casualties of every rebellion are made up of the cohorts of little guys. In our contemporary myth we can supplant the “evil” King John for the “evil Wall Street” (the shorting hedge-fund managers) and the “good” Richard the Lion Heart with the “good Wall Street” (the hedge-fund managers and investment banks financing the democratizing trading apps and platforms, along with some billionaire pundits).

The result of the rebellion in a way is academic, as it will be “The King is dead, long live the King.” In the meantime, it will be necessary to feed the myth with heroic tales of rags-to-riches retail traders. This will in turn be accompanied by tales of the wholesale slaughtering of the retail traders who mistimed their arrival on the battlefield. To support itself, the status quo needs its myth, and the myth needs its heroes.

Perhaps those who are ignorantly peddling and believing in the revolution theme should pause for a moment with some further English story telling and recall a line from John Lennon’s icily cynical “Working Class Hero:”

“But you’re still f***ing peasants as far as I can see.”

© 2021 Plotinus Asset Management. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

Image Credit: Artist Justin Wolf at Shutterstock.

So Long, Farewell, Auf Wiedersehen, Goodbye to 2020

by Plotinus Plotinus No Comments

The New Year gives us a moment to reflect on the impact of 2020. What was a grim year economically, proved to be a stellar year for some financially. Meanwhile, the uncertainty of the lockdown further validated our AI-based approach to stock-market investing.

The Pandemic

This is obviously the issue that probably defines 2020 for most people. Looking at it from the isolated perspective of its impact on US equities, when viewed from the year end, to quote Mr. Sinatra, “It was a very good year.” The NASDAQ had a stellar 43.6%, the S&P 500 a significantly above-average 16.3%, and even the Dow with its traditional tilt toward the very hard-hit industrials sector managed to clock in a 7.2% gain. All of this despite the markets responding with a violent panic at the end of February into early March, as Europe began its lockdowns and the old familiar norm disintegrated. Compare that for example to the UK’s FTSE 100 which rounded the year with -15.2% (this loss was substantially mitigated by a post-vaccine-announcement recovery). As we noted in our August white paper Artificial Intelligence: The Post-Pandemic US Equity Strategic Allocation, the US equity markets had absorbed the pandemic, and contrary to the prevailing atmosphere of pandemic gloom, there was plenty of room for growth ahead.

Artificial Intelligence Strategies

The lack of any meaningful precedence for the kind of upheaval witnessed in 2020 was a tremendous acid test for Artificial Intelligence trade-decision-making as a technological approach to asset management. How, for example, did Plotinus’ AI systems hold up? We were very pleased. As one highlight of our efforts, the Enhanced Index outperformed its benchmark.

The Plotinus 2π Enhanced index returned a very solid 20.5%.

Lessons Learned?

The experience with US equities in the last twelve months, in spite of its uniqueness, can be understood in a broader macro environment that has been developing over a number of years. The low interest rate conditions seem likely to remain for the foreseeable future, having the effect of further tilting the balance of attractiveness toward equities. Combine this with the hypothesis that due in part to the growth of passive index investing, the US market indices are no longer just a reflection of general economic health, but that they are increasingly an actual measure of the current and future wealth of the nation. This means that maintaining and protecting US indices by default becomes an indirect part of national monetary policy in which the indices in effect are “too big to fail.”

This dynamic can be seen in the aforementioned disparity in performance between the US and UK mainstay indices. It is also particularly interesting that this need to protect the indices is apolitical. Two recent incidents provide illustration of this. When one considers the stark political divisions, the flipping of the senate following the Georgia run-off elections, was received positively by the markets. Furthermore, in light of the extraordinary scenes from Capitol Hill, the markets’ response was only a brief jitter. None of this of course makes the US equity market immune from turmoil, but one must always consider that when it hits hard times, repercussions are likely to be felt globally (as we saw in early March). The key difference between the US market and the rest of the world is that the US market is propelled by the scale and strength of the US economy, enabling conditions for a more rapid rebound even in extremely difficult circumstances.

© 2021 Plotinus Asset Management. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

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Three Thoughts on Artificial Intelligence in 2021

by Plotinus Plotinus No Comments

2020 could be said to be the year of AI everything, when AI applications seem to be entering into every sphere of daily life. With investors being presented with strong evidence that AI strategies are the new alternative investment, here are our three thoughts on AI in 2021.

1. AI Everything

There is building investor confidence that with AI a new page in technological progress has been turned and with it a raft of new business opportunities will present themselves. The field of AI in asset management is in a particularly strong position to gain in 2021. With many investors seeking yield in the post pandemic environment and some strategy types delivering unexpectedly disappointing results in 2020, AI strategies pose a fresh alternative investment. These approaches are particularly attractive for those looking for liquid, easily benchmarkable investments.

Investors have accompanied AI on its journey over the past decade, with many of course, choosing to sit back and observe where things would go, before committing to invest in it. The industry has come a long way from the false dawn of a decade ago, when there was much speculative interest in AI but little tangible fruit to show for it.

Everyone recognizes that the technology has advanced significantly in the last ten years but less obviously, and possibly more importantly, there has been enormous progress on the development of different AI approaches. In 2021 we will likely see an increase in the use of nuanced AI approaches, such as in task-specific AI technology and increased hybrid usage, where AI is used in conjunction with and to complement human activities.

This evolution has seen AI become a recognizable presence in much of the world around us as it is integrated into and used to enhance familiar systems across many sectors, with applications as diverse as the assessment of oil wells to the analysis of medical imaging.

2. The Translucent Box

Investors are familiar with ‘black-box mentality’ which is synonymous with systematic trading. As a consequence of the complexity of AI systems, there is a strong onus on AI managers to be able to explain the investment process. This helps investors build trust in AI strategies. It takes them out of the black-box, the unknown, and enables them to be understood from a perspective familiar to the investor, without expecting them to have full grasp of a complex technology.

There is a greater demand emerging for AI systems to be humanly explicable, particularly when they are not easily comprehensible. This is a very useful development as it forces a clarity on developers of AI systems. This in turn helps separate ‘real’ results (those which are explicable) from those which are simply ‘correct’. This is a strange facet of AI development: You can end up with correct results and yet have no idea how the system obtained them. In some fields of deployment where the results being obtained are not of much consequence, how they were obtained is not so important. In other areas, particularly those which demand a sensitivity to human beings, however, being able to explain the how and why of it, is crucial to prevent people feeling alienated from the technology and fearful of it. Asset management fits into this latter category.

3. Regulation and Data

For participants in the financial sector regulation is so much part of the furniture that we expect it to be there and when it is not, we attempt to gauge when and in what form it will materialize in the future. Regulation is an anathema for the technology and communications sector and is treated like a sudden inconvenience with the potential to become its nemesis. AI fits very much into the tech mold and many of its users have casually assumed that they will have free reign on data and information usage without any interference or interruption. This fails to recognize the degree of change that AI is bringing to our daily lives. The extent of this change, and peoples’ sensitivity to it, is such that regulation is inevitable.

The torchbearers of regulation, the EU, provided a recent illustration. The EU Agency for Fundamental Rights issued a warning on the use of AI with respect to the rights of the individual in a report released on December 13th, forming part the process to establish EU rules on AI usage.

This report was focused on issues pertaining to security (with the potential for government overreach), medical diagnosis and targeted advertising, concerns regarding personal data/information rights. It can, however, be viewed in a broader context. The gradual definitions being imposed on who owns, or can use, what data, has been an elephant in the room when it comes to over reliance on big data. The tendency to simply pump more and more data into AI decision-making systems will start to get tripped up when it comes to suddenly being unable to use some data set or data subset due to regulatory or ownership constraints. This prospect has the ability to derail many overly-complex decision-making processes which can be exposed to vast arrays of data. 2021 will likely see the slow-moving wheels of regulation churn toward AI. Hence it would be advisable to seek out AI opportunities which have already taken a proactive approach with regards to how they insulate their processes from data-usage dangers. One example would be those with a focus on using derived data.

© 2020 Plotinus Asset Management. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

Image Credit: Kentoh at Can Stock Photo Inc.

Is Karl Chuckling?

by Plotinus Plotinus No Comments

The new US administration is making its foreign relations preparations to assume power in January under the banner “America is Back.” The phrase contains what some non-Americans might call American Solipsism. This is fed in part by the mistaken notion that the whole world has been moving in an Americentric or more specifically a Trump-centric orbit for the last four years, simply because all US political/media debate thought it to be so. What has been most striking for the outside observer from abroad, one step removed, was the totality of it, ½ + ½ = 1, regardless of which side of the US political divide, which could be parodied as total hate or total love of the 45th president.

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AI Strategies Are New Bedrock for Portfolio Management

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Artificial intelligence can be deployed to help investors navigate the post-coronavirus backdrop. Whereas popular yield-enhancing strategies, such as venture capital, often require redemption lockups and may lead to valuation surprises, advanced technology empowers portfolio managers to exploit otherwise established trading patterns in public securities, argues a new white paper by Plotinus Asset Management.

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Long Washington, Short London

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With the US presidential election now appearing to be over we are seeing much of the world’s excess media attention that the election had been vacuuming up in recent weeks, return to the theme that has dominated 2020, Covid-19. From an investor’s perspective this return to the pandemic focus means trying to continue to assess its economic/investment consequences and its various governmental mis/handlings globally.

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Side-Stepping the Maelstrom

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As the US election makes its last twists and contortions toward its finale, there are clichés a plenty to describe its unique ‘never before, in a time like no other’ status. Partisans and pundits feast on every breath, tweet, or throat clearing from the White House.

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What’s In a Name?

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We are often asked about the origins of our firm’s name. What connection could a philosopher of antiquity have with artificial intelligence decision-based trading?

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US Stocks Poised for Further Upside

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Economic nationalism worldwide will favor ongoing strength in US-traded stocks, as global investors shift their attention to the most stable economies, argues a new white paper by Plotinus Asset Management. The US is the most sensible opportunity amid geopolitical uncertainty.

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Finding Context in Numbers

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From a US financial perspective, the month of July was a tale of two numbers. The S&P 500TR produced the first month-end positive return of the year at 2.48% and GDP growth figures for the second quarter hit an astounding low of -32.9% annualized. This appears to leave the investor with a deep markets/economy dichotomy.

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