Tag Archives: Financial Engeneering

Financial Industry To Spend $90 Billion on New Technology

Between 2001 and 2005 the financial industry spent billions on developing new derivatives and other complex financial instruments. Nobody really understood what was going on until it all came tumbling down in 2007/2008. Now, something similar is happening; the financial engineering is swapped with pure engineering. The industry is expected to spend $90 billion on new superfast computer systems equipped with artificial intelligence and advanced algorithms that no one – except for the engineers who made them – really knows how works.

“Investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”

Daniel Mayo

The financials markets industry’s spending on information technology will hit almost $90 billion by 2015, driven by strong growth in the Asia-Pacific region, and a bounce-back in the hedge funds sector, according to an analysis by the independent technology analysis firm, Ovum.

The analysts find that the Asia-Pacific region will see some of the strongest growth in financial markets IT spend, as global companies continue to transfer power to the region due to its growing economic strength, advancedtrading.com reports.

In China, IT spending will grow by a compound annual growth rate (CAGR), of 8.8 per cent from 2011 to 2015. Meanwhile, Hong Kong will experience a CAGR of 8.1 per cent for the same period and Singapore 7.1 per cent.

Although the amounts invested will be lower, growth in all three will outstrip the US and the UK and Ireland, which will hit CAGRs of 6 per cent and 5.8 per cent respectively.

Daniel Mayo, financial markets technology analyst at Ovum, comments:

“While there will be growth in nearly every major market, the Asia-Pacific countries will be at the forefront. This is mainly due to global companies shifting their decision-making power from New York and London to cities such as Beijing, because of their growing economic influence.”

Meanwhile, global spending on IT in the hedge funds sector will grow a CAGR of 11.1 per cent from 2011 to 2015.

This is the strongest growth of all the lines of business and is being driven by a resurgence in the hedge funds market as investors seeking high returns forgive the woes of 2008/09.

Mayo adds: “The hedge funds market was badly affected by the financial crash, with investors staying away due to its disastrous performance. As a result, investment in IT fell significantly in 2008 and 2009. However, investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”

According to Mayo, much of the investment in all regions and lines of business will be made in risk management systems, as well as reporting systems that allow financial markets companies to provide greater transparency and comply with new industry regulations such as Basel III.

Let’s see how long it takes for the law makers and regulators to catch on this time…

More from advancedtrading.com:

Meanwhile, the extreme volatility we’ve experienced over the last few days, are still puzzling many experts.

There’s an interesting article at NorthJersy.com well worth reading.

Here’s some of it:

Wall Street’s wild ride Tuesday may be due less to rational decisions and more to computers automatically trading stocks at lightning speeds.

Large institutional investors like mutual funds often employ strategies to buy and sell stocks or funds at certain pre-programmed prices.

Other traders, meanwhile, employ high-frequency strategies and offload or buy huge blocks of shares in minutes or seconds, depending on how markets move.

“Volatility begets volatility,” says John Longo, a professor at Rutgers Business School.

“No doubt about it, whenever you have these dramatic moves in a short period of time, programmed trading is largely behind it.”

Much of that trading takes place not on trading floors but within vast rows of computer services inside North Jersey data centers.

Years ago, when humans conducted the vast majority of trades on Wall Street, Monday’s roughly 6 percent market plunge and Tuesday’s roller-coaster ride that ended with major indexes recouping much of their Monday losses might have been less dramatic, experts said.

The markets would not have gyrated so quickly, and the ups and downs might have taken place over days, not minutes and hours, experts says.

Some electronic trading strategies involve chasing momentum — automatically buying stocks on their way up or selling as they lose value. And swings in the marketplace will always be driven by economic events — such as Standard & Poor’s downgrade of United States bonds, Europe’s debt crisis and the Federal Reserve’s announcement Tuesday that it would keep interest rates low through 2013.

“Definitely, there will be some events that move markets,” says Frank Zhang, a professor at Yale University’s School of Management who has studied computerized trading, which he estimated accounted for 80 percent of trading volumes (other estimates have pegged it closer to 50 percent.)

Adding: “But I think computer trading exaggerates such events.”

Adam Sussman, a partner at The TABB Group LLC, a Wall Street research and advisory firm, says the high-frequency trading firms feed off Wall Street volatility, which is often fueled by investors’ fear.

“When humans are panicking, the computers do better,” Sussman said.

He didn’t see high-frequency trading as necessarily being responsibility for recent volatility.

“They’re not really causing it, because they’re responding to market conditions,” he says.

I assume some might argue with that statement.

Related by the EconoTwist’s:

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Poland Goes South?

According to an analysis by PolandSecurities,com, the Polish nation is in for a financial shock that may put Greece in the little league by comparison.  For the last six years the people of Poland has increased their mortgage debt by nearly 800%, fueled by overoptimistic forecasts provided by the local government, foreign banks and the EU. The transfers from the EU made it possible for the Polish government to minimize effects of the 2008-2010 crisis, but also caused a complete lack of any financial reforms. Over the last 3 years, Polish public debt has risen from 529 billion zloty to 778 billion zloty (195 billion euro). This looks like another catastrophe just waiting to happen.

“We were dealing with either lack of common sense or with corruption of the employees of financial supervisory sector.”

Jaroslaw Suplacz

This piece of insight provided by Polish analyst Jaroslaw Suplacz is right out scary. For some reason, the economic developments in Poland have been flying under the radar. Perhaps not surprising when you learn that 90% of the population see tax fraud as a completely normal thing, and corruption as a natural part of business.

If there’s such a thing as an overstimulated economy, Poland definitively falls into that category.

The Polish GDP is strongly influenced by a stream of financial transfers from the European Union. In 2010 the net income from the EU budget was about 8 billion euro.

If not for the transfers from the European Union, the change of the Polish GDP (in relation to 2009) would have been lower by at least 6 percentage points, and would be dropping sharply.

Moreover, the Polish annual GDP is about 350 billion euro, the amount of net income of 8 billion euro from the EU’s budget is equivalent to 2.3 % of the GDP.

However, PolandSecurities.com point to the following facts:

“In a short-term life cycle assessment, it can be estimated that expenses resulting from a subsidy that Poland receives have a multiplier effect of 3-4 times. Companies and employees completing projects financed by the Union spend monies earned on other goods and services so that other producers also purchase others goods etc. Already in a short period concerns the projects implementation it is possible to consider that the amount of 8 billion euro of annual income from the Union increases the Polish GDP by at least 20 billion euro or by about 6 percentage points.”

The Polish government explains that the high deficit of public finances stems from financial transfers from the Union, and is a result of a need to provide own contribution when implementing projects co-financed with assistance programs.

But Jaroslaw Suplacz  writes:

“This justification is good for the public and within the framework of a political campaign, however is it not well grounded in facts.”

And now it starts getting really interesting…

The transfers from the Union made it possible for the Polish government to minimize effects of the of the 2008-2010 crisis. But they’ve also caused a complete lack of any public finance reforms in Poland, according to the analyst.

Poland had one of the highest budget deficits in Europe in 2010, higher than in Iceland and just a bit lower than Greece, and is one of the EU member states with the highest budget deficits (higher than 6 percent in 2010).

But while Greece in 2010 decreased its deficit from more than 15 percent of GDP in 2009 to about 8 percent, Poland increased its deficit from 7,1 percent to almost 8 percent of GDP.

The forecasts by the governments Ministry of Finance predicted a drop of deficit to 6,9 percent of GDP.

“The obligations of the Polish budget practically do not capture the reserve pertaining to demographic changes for earned benefits for future retirees. The reserve created for this purpose is a fraction of the state’s obligations of the benefits owed to the future retirees. If a reserve resulting from demographic changes were considered in its real amount, it would transcend the relation of 60 percent of public debt to GDP by tens of percentage points.” Mr. Suplacz writes.

And it just keeps getting worse:

“Much of the resources transferred within the framework of assistance programs are wasted in Poland. A country of a high level of corruption is unfortunately quite different from France, Germany or Denmark. As an example, money for the training of the unemployed directed to employment offices seem like a very sensible idea. However, how is this program executed in Poland? More than one local official, upon seeing the pools of money that will pass through his/her office is motivated to contact an owner of a training company or call on a company of a friend which will be training the unemployed from the Union means. The tender for the service for the office has high chances of being fixed by the arbitrators who evaluate it. The higher the level and with larger projects, one can expect corruption.”

“Another example of the waste of Union money in Poland is the financing of controversial projects. For example, in Plock city, of which I am a resident, the construction of a pier with a restaurant – pictures link – was funded from Union monies. The media make fun of this investment that it is probably the only pier in Europe built along a river with the
restaurant from public monies. The Poles know very well that the Union is not too stupid and before it opens its eyes, one should take as much of what is given… This manna from heaven caused a situation in which officials at all levels are busy going through as much of the Union funding as possible, nevertheless the real problems remain unsolved.”

And here’s a real kicker:

“When it is all accounted for it may turn out that it was not only the Union who lost money on the assistance programs but also Poland may turn out to be a losing party, where the distribution of Union funding only increased the scale of corruption and first of all the reform of public finance has been neglected.”

This one is for Mrs. Angela Merkel:

“The Germans are probably starting to understand that they have been set up and that they should watch the value of their currency and besides the reality of a world economic crisis which includes their country just the same as any other, they have to struggle with problems which are not theirs. The wealth of Germany may evaporate very quickly in this way because they are in a very different situation than the United States. From a point of view that emphasizes the well-being of Germany, their anti-crisis policy should be opposite to the one conducted by Ben Bernanke – more on this subject under “Between Monetary Policies. Where are markets heading to?”” (Copy here).

For the rest of the EU leaders – here’s to you:

“The attempt to fight the deficit showed that the blanket is getting shorter and shorter, the rate of shortening of the blanket must be troubling to the government, it is clear that the Polish economy is not able to meet the markets’ demands on one hand, and the roused hopes of the Poles which the government constantly increased in the name of a permanent election campaign, on the other. Both realities have to collide with each other. All of the energy of the government is directed towards survival until the elections. In Poland the parliament, but even self-governing entities are a partisan booty and the time horizon reaches the elections period.”

“Unfortunately, the western, more developed democracies did not foresee some things, their assistance programs very often serve to support social pathologies, ineffective budgets and they lead to the bankruptcy of economies that they assist.”

Well, I guess that’s what “animal spirits” are all about….

As a preliminary conclusion, Mr. Suplacz writes:

“The most fundamental form of the revaluation of the Polish debt will be the drop in the value of Polish zloty, which will be forced by the market. At the same time, the government, to decrease the burden of domestic debt denominated in zloty will be forced to lower the real interest rates, which is most often achieved indirectly through the increase in inflation. Inflation will at the same answer to the devaluation of zloty. A shock awaits Poland with the adjustment of expense possibilities, both public and private, with economic possibilities. Labor efficiency, structure of employment, number of people using retirement and pension benefits, holes in the retirement system, financing of health care, countering pathologies such as corruption which unfortunately place Poland closer to Russia than to Europe, all of it is awaiting changes.”

Please take the time to study the full analysis, embedded below:

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Hedge Funds Pull in USD 73 Billion in First Half of 2011

Yes, someone is always making money – even if the markets are dropping like dead pigs from the sky. Hedge Funds Pull in $3.8 Billion in June, the sixth straight month of inflow, and increased the value of their portfoilios by $ 73,0 billion in first half of 2011. The hedgde funds bearish multi-strategy is certainly paying off these days.

“But we wonder if strong inflows will persist through the remainder of the year in light of the recent bloodbath in equities.”

Sol Waksman

In addition, fixed income hedge funds reports of 13 months of inflow in the past 14,  and turn in the second-best performance of all hedge fund strategies in the first half of this year. Macro funds also posts solid inflows. but are still underperforming, according to the latest reasearch by BarclayHedge and TrimTabs.

The hedge fund industry took in $3.8 billion (0.2% of assets) in June, the sixth straight inflow as well as the eleventh in 12 months, report BarclayHedge and TrimTabs Investment Research.

Industry assets decreased to $1.806 trillion from $1.822 trillion in May because performance was poor.

The Barclay Hedge Fund Index decreased 1.0% in June.

“Investors were very kind to hedge funds in the first half of the year,” says Sol Waksman, founder and President of BarclayHedge.

Adding: “The industry raked in $73.0 billion (4.0% of assets), which goes down as the heaviest first-half inflow since 2007.  But we wonder if strong inflows will persist through the remainder of the year in light of the recent bloodbath in equities.”

Fixed Income hedge funds hauled in $15.1 billion (7.9% of assets) in the first half of 2011, the second-heaviest inflow of all hedge fund strategies.  These funds took in money in 13 of the past 14 months and returned 4.9% in the first half of the year, the second-best performance of all strategies.

“Fixed Income funds are on fire,” notes Minyi Chen, Vice President of Quantitative Research at TrimTabs.

“Keep in mind that hedge fund managers, alongside most other segments of the market population, have been bearish on the long end of the curve all year.  Nevertheless, the yield on the 10-year Treasury has plunged to 2.36% from 3.75% in February,” Chen point out.

Multi-Strategy hedge funds raked in $15.2 billion (7.2% of assets) in the first half of 2011, the heaviest inflow of all hedge fund strategies, even though they posted a mediocre return.

Similarly, Macro funds and Emerging Markets funds posted two of the heaviest inflows despite turning in the two worst performances of all hedge fund strategies.

“We see lopsidedness between performance and flows regularly in not only our hedge fund flow data but also our retail and institutional flow data,” Chen notes.

“These imbalances are predictive more often than not.  We believe investors should consider investment candidates that are performing well but not attracting heavy inflows.  Similarly, we fear any asset class into which investors keep flocking despite poor returns,” he says in a press release.

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