At a time when making money in the markets is increasingly difficult, technology can provide an edge, says James Davis, chief investment officer at the OPSEU Pension Trust.
“You need to have an edge, and the edge historically has been relationships and information asymmetry,” Davis says. “Now you’re going to need an edge in the technology space to be able to identify the kinds of themes or the kinds of relationships that you, before this technology existed, would never have been able to identify.”
The OPTrust’s focus on innovation allowed it to beat stiff international competition to take home an award for innovation in institutional investments at the 2019 volatility and risk premia awards.
Among the examples cited for the pension fund’s victory are developing algorithms internally to inform shifting risk in the total fund portfolio and using artificial intelligence to enhance asset allocation strategy.
Specifically, the plan developed a tool in 2018 to help the total portfolio overlay committee determine how to allocate among different risk factors and when to shift risk, says Brandon Da Silva, investment analyst at the OPTrust.
The committee meets to discuss what’s going on in the macroeconomic environment and vote on whether it should shift risk around to better manage the plan’s portfolio, reduce drawdowns and preserve capital for the long term, says Da Silva, noting it wanted to add another level to enhance the decision-making process.
As well, in designing the algorithm for the committee to use, it was key to make the signals it sends as understandable as possible and include information about what is driving the machine’s decisions, he adds.
“What you’re trying to do is look inside the black box,” says Davis.
While machines are now part of the process, the computer doesn’t just generate signals and sent it to the stock exchange, he adds. “What happens is you create what is effectively a tool that can help you do your job better, but you still apply discretion over and above in the decision-making process.”
While the OPTrust may get more confident over time to allow machines to make more decisions, it’s a learning process at this point, says Davis.
“It’s not just the machines that are learning. We’re learning too.”