Understandable Artificial Intelligence
Overview
©2018 Economic Data Sciences
EDS was given 2 sample portfolios by a UK pension fund advisor. Since only the asset weights were known, EDS tool deducted investors' preferences and the goals of each fund
- Portfolios were optimized using combined holdings and Passive Indexes
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The goal in the second portfolio was to increase exposure to U.K. inflation
- We show how EDS software increases that exposure while attempting to keep other metrics stable
Balance Every Risk and Opportunity
©2018 Economic Data Sciences
- When optimizing a fund, EDS tool focuses on the following:
- Maximizing units of return for every unit of risk
- Maintaining likely investment preferences
- Using this approach ensures to get the most from each trade-off
Enhanced Insights With A.I.
©2018 Economic Data Sciences
Many of the details in these portfolios were hidden. Using our tool we back out some initial estimates
- Our A.I. was given relatively little about these portfolios
- In a real world scenario these insights should be reviewed and validated by human team members
- The purpose of our approach is always to be working in tandem
- Duration Decomposition
- Using given data we can back-out the asset duration (rate/inflation)
- Using our A.I. we can extend that to the LDI portfolio and return seeking portfolio
- We estimate ~40-42 year interest rate duration for LDI
Extended Insights With A.I.
©2018 Economic Data Sciences
Our tool compares the relationships between factors and trade-offs
- In these examples, this provides some powerful benefits
- In many cases duration targets are set by mandate
- We look beyond that to illustrate other possible insights
- Groups and types
- Interest rate and inflation exposure are important to managing these types of portfolios
- Our A.I. can look at factors in isolation but more importantly together
- This allows us to look at groups like global interest rates or inflation and almost any other
Client 1 Solution Funds
©2018 Economic Data Sciences
- Funds were selected between the 2 client funds and passive indexes
*Data from EDS, Redington, & Bloomberg, courtesy of London Business School
Portfolio Metrics
©2018 Economic Data Sciences
Risk Exposures
- EDS solution maintains similar exposure to risks
- Any of these can be adjusted depending on actual client preferences
©2018 Economic Data Sciences
Current Portfolio EDS Solution
Current Portfolio EDS Solution
Standard Deviation Decomposition
©2018 Economic Data Sciences
Current Portfolio EDS Solution
*Data from EDS, Redington, & Bloomberg, courtesy of London Business School
Factor Risk Decomposition
©2018 Economic Data Sciences
Current Portfolio EDS Solution
Portfolio Optimization
Client 2
Opportunistic Range Seeking
©2018 Economic Data Sciences
Given the approach of our tool, it is possible to extract existing implicit preferences from a portfolio. We can then build on these and opportunistically seek other objectives or avoid risks
- In this example we focus on increasing exposure to U.K. inflation
- Using our estimate of implied preferences we then scale up this objective
- We can see the A.I. opportunisically finding the best available trade-offs at each point.
- These spectrums are often not smooth
- This highlights the power of our tool as it can find these 'non-convex' or 'hidden' solutions
Portfolio Metrics
©2018 Economic Data Sciences
Conclusion
©2018 Economic Data Sciences
We seek to add value to your process and team with an innovative and powerful suite of customized tools
- Let your human team focus on more valueable work than data cleaning and search
- Machine Learning can point them to new insights more efficiently
- Combining models allows for a more complete view of risk
- A deeper understanding of the connection between models
- Keeping better balance
- No human can keep track of everything, we believe A.I. can supplement the process and provide more informed decision making an
Disclaimers
©2018 Economic Data Sciences
Get In Touch
©2018 Economic Data Sciences
info@EconomicDataSciences.com
info@EconomicDataSciences.com