Insights

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Shifting Market Forces in Asset Management

Most of us have had to change the way we work over the last year or so - and it's been interesting. But spare a thought for the asset managers, they were experiencing a change in paradigm before we were - and for the majority of them it's not been a pleasant experience... Read More

In todays article I'm going to look at how and why their world changed and how we've seen that it could be changed back.

Over the last few years we’ve seen a shift in market forces which have impacted asset managers more than most, especially in the field of digital assets.

A combination of long bull runs, technological advancement and comparatively low volatility has caused clients to question the value of active portfolio management.

On top of these factors we have the fundamental misunderstanding of passive management as a strategy.

According to MorningStar, Passively managed funds grew at approximately 5x the rate of actively managed funds during 2020.

So what are the drivers for this change in paradigm and what can the industry do to counter it?

Lets start by considering how asset managers typically make money.

Asset managers typically charge several types of fees, and these will vary by asset manager:

Management fees

AUM fees

Transaction fees

Management fees relate to the asset manager charging a fee to hold a clients assets – whether trades take place or not.
AUM fees equate to the asset manager charging a fee based on the value of assets under management – again, this does not imply that any trades have taken place during a given period. This type of fee typically reduces as the assets under management increase.
Transaction fees are exactly as you’d imagine, a fee based on a transaction that has been performed. So why are investors moving to passively managed funds?

In recent years, actively managed funds have underperformed passively managed funds (in general). Passively managed funds normally have a more economical fee structure and so the investor is able to see a correlation between more consistent results and lower fees compared to higher fees and a more variable result.

It should be noted that there are asset managers who have outperformed the market, but on the whole this has not been the trend.

How can passively managed funds be better than actively managed funds?

This question highlights the misunderstanding of what exactly passively managed funds are.

In the main, passively managed funds are based on indexes, or parts of them. The asset manager will choose which fund a client backs based on the client’s risk profile.

And this is where you should be saying “What?” – because this is the fundamental misunderstanding.

When an index is created, it is created by fund managers and stock pickers – so it is created by the same people that would be managing client funds in an active setup.

So does a passive management strategy reduce the risk of loss – No.

Is a passively management strategy cheaper for the investor – Typically yes

This leaves us with a question, what is the investor gaining by using a passive management strategy? One of the main benefits, aside from cost, is that the asset allocation decisions are taken by more experienced traders which are in theory better at creating a successful allocation – but this is in theory and there’s no guarantee.

So whilst a single passively managed fund may not guarantee success it is possible to allocate a clients portfolio across multiple funds in order to match their risk profile – realistically speaking this is comparable to taking the average of an average in order to reduce risk and move closer to the center of the bell curve of performance.

In theory the best results should still be possible with an actively managed portfolio although it does include a degree of risk - because rather than sticking with an index in order to gain market or better performance the actively managed portfolio would move into and out of assets based on the best possible return at the time.

How can asset managers counter the rise of the passively managed portfolio?

In the wake of the FCA asset management review and subsequent rule changes, along with the US securities and exchange commission ruling regarding the need to behave in the best interest of the client when performing transactions (or providing recommendations); Asset managers will need to be able to perform post trade analysis and report on it.

This is also in line with the requirements of MiFid II (pricing) and PRIIPs (providing simple, complete information for retail clients relating to the offered investment product(s)).

This alone will not facilitate a paradigm shift in asset management strategies or investor adoption of active management.

One of the key, psychological, drivers for investors towards passive management is the understanding of the effect of fees on long term returns. This includes not only the value of these fees but the complexity of them.This is the aspect of active management that could be changed in order to facilitate increased up take of actively managed funds.

The changes that we have seen at CTEX Markets are two fold:

1. Asset managers managing clients funds at the client venue

2. Asset management fees are increasingly based on performance only

We've seen that it is possible for asset managers to manage their own exposure whilst also providing clients with complete transparency - and this is how we think that the market could be convinced to move back towards actively managed portfolios.

Paul Foley

CEO – CTEX Markets

CTEX Markets is dedicated to helping asset managers (and portfolio managers) to achieve the best possible results for their clients - so if you'd like to know how our platform could help you, reach out to us - Asset Managers See Less

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Trade Support Tools — Sentiment
Analysis

Here at CTEX Markets we’ve been developing our intra exchange trading platform. We’re quite lucky in that our team comprises of people who come from a financial services and trading background. During the course of our analysis and subsequent development we’ve been asked a lot of questions by both potential investors and partners. We’ve already discussed a couple of those points (price aggregation, order books, spotting scam investment opportunities and security concerns) — which brings us on to one of the questions that we’ve had from traders

Ironically enough this question has been asked by people who are in the industry or do have a background of being a professional trader — so if these guys are asking us questions what chance does everyone else stand?...

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The question was this:

“What actually is sentiment analysis and where does the data come from?”

“This is where having team members with trading and trading platform development experience is of value.

Before answering the question lets take a look at the background that everyone trading crypto should understand — and this is where we start by looking at trading styles.

When we consider trading strategies we see that they fall into one of two categories — technical or fundamental. Traders normally sit on one side of the fence or the other — not both.

Fundamental analysis techniques/strategies are based around trying to identify the value of an asset based on social and economic factors such as how is the market in general, what political activity is happening around the company, are there any threats/opportunities facing the company, how were their sales, who are the directors — and the list goes on and on (and involves following news, social media, trade publications and industry trends). This method of analysis involves a lot of what we would typically refer to as social/psychological indicators in an attempt to predict where asset valuation will go in respect to the market.

Technical Analysis is more maths based and you’ll probably have seen support tools for this type of trading in whatever platform you’re currently using. With technical analysis the trader is effectively ignoring the psychological aspects of the analysis because they think that the market will have already taken these into account with the current market valuation. The technical trader is instead concerned with identifying patterns/trends in the asset price (over time) and achieves this by using mathematical indicators.

Lets take a look at a simple indicator to better understand the idea.

Below you’ll see an example of the RSI indicator (Relative Strength Indicator) applied to the EUR/GBP market (I chose a currency market as the prices are typically more volatile than crypto and this makes for a clear illustration).

For those of you who have not seen the RSI indicator before the key point to note is that there is a horizontal line at 70 and 30 (70 is shown on the illustration but 30 is off screen for this asset).

The idea here is that if the green line crosses the 30 moving downwards then the asset is over sold (which means the price should swing positive) and if the green line crosses the 70 line (upwards) then the asset has been over brought meaning that the price should drop — and as we see on this chart the price does drop after the asset had been over brought.

On the surface of it this might look like a magical money making opportunity — if all you have to do is put an indicator on a chart then why isn’t everyone just printing their own money?

One of the key points to understand about indicators that you apply to a chart is that they lag the price movement — which is fine if you identify a long lasting trend but not great in a volatile market. There’s also the idea that previous performance is actually no guarantee of future performance (imagine you’d brought an asset based on the trend prediction being positive and then there was an earth quake under their company’s office, a military coupe, a scandal with one of the directors………. And the list goes on).

So how can the average trader really work out what’s going to happen next?

For the retail market the most popular type of trading is technical analysis based, this allows the trader to take advantage of indicators and models (and trading bots depending on the platform).

But the fundamental analysis shouldn’t be ignored as the price of an asset could be argued to be driven from a psychological basis.

And this is where we get back to the initial question — Sentiment Analysis.

And this is also where you’re potentially going to be disappointed or shocked (spoiler alert!).

A number of platforms offer you an indicator that they explain as a sentiment indicator or market sentiment indicator, it typically looks like this:

So in this example 12% of the market expects the price to go down and 88% expect the price to go up.

Again, at first look this looks great — until you understand one key point. Normally when a platform displays market sentiment they’re displaying the sentiment of people trading on their platform, not the overall market. You could be lucky, you could be using a platform where everyone else is a genius and you’re the only normal person there — which means this indicator is golden. Alternatively, you could be seeing an indicator that is based on a restricted demographic (white males, 30–45, east coast Australia) — this then means you’d be seeing an indicator with a built in social bias which is not the same as the overall market bias and so actually could be giving you a completely false idea as to what the market is doing. If you log in to a different platform you may even find the indicator is contrary to the first indicator (again due to social bias).

This idea of the indicator showing something different depending on the platform is perfectly illustrated in the crypto world. As we’ve mentioned before the crypto exchanges keep their client bases isolated (remember the piece on order books?).

So how can you trust a sentiment indicator?

This is where we turn to AI and big data.

There are a few companies out there who are providing AI based sentiment analysis tools as a standalone product (we’ve built ours into the platform). The way that these tools work is typically not by looking at the buy and sell data across the market (because it can be gamed with orders in place of market orders) but by looking at social data — so news, social media feeds, industry web sites etc. The platform analyses different aspects of these sites and gives them a weighting based on relevance/expert status (I’m not going to go into exactly how our algorithms work for obvious reasons).

Why are these type of sentiment analysis tools better?

Because we’re taking information from multiple sources, applying a weighting to them and by grabbing data globally we’re assuring that we are not just looking at white males, 30–45, from east Australia but instead we are looking at global data/trends so we’re attempting to move away from social and geo political bias in an attempt to understand exactly what is happening underneath the markets (not lies, bias or gaming of the individual exchanges/platforms).

We hope that you’ve enjoyed this peek into the mechanics of trade support tools and strategies and we’ll look forward to sharing more information about our AI based tools at a later date.

The CTEX Markets team believe that it is only with knowledge that success is possible — and we’re happy to share our knowledge with the community.

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CTEX Markets, a next generation
inter-trading interface.

The number of new exchanges keeps increasing, indeed, it does exist a huge number of exchanges where you can trade cryptocurrencies. But if number of exchanges are increasing, it is because obviously there is a demand. Although there are many types of crypto traders’ profiles, you can be sure they have more than 3 crypto trading accounts, for many different reasons, such as trade in different altcoins, trading fees on transactions/membership, and the coin prices that can be different from one exchange to another.

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Unfortunately, having several exchange accounts makes it difficult to keep track of the price fluctuations, and it is easy to miss out on trading opportunities...

CTEX Markets, a next generation inter-trading interface

The number of new exchanges keeps increasing, indeed, it does exist a huge number of exchanges where you can trade cryptocurrencies. But if number of exchanges are increasing, it is because obviously there is a demand. Although there are many types of crypto traders’ profiles, you can be sure they have more than 3 crypto trading accounts, for many different reasons, such as trade in different altcoins, trading fees on transactions/membership, and the coin prices that can be different from one exchange to another.

Unfortunately, having several exchange accounts makes it difficult to keep track of the price fluctuations, and it is easy to miss out on trading opportunities.

We are proud to present ctexmarkets.com, that will allow users, to link their API keys of the trading platforms they are using, to its very easy to use and very comprehensive interface.

The CTEX Markets project involves the launch of both, a platform and a set of services through the “trade buddy App”. The platform will deliver a combination of arbitrage, AI, education and Atomic Swap to deliver trading functions and to reach the masses whilst using service offerings to reach the institutional markets, crypto traders, and the retail markets by investing into customer care and automation technologies.

The trade buddy app will make other features available to the user such as market insights, chat bot for support, social trading and graphical technical analysis.

Hereunder some of the services it will offer:

  • Price Aggregator — The price aggregator takes the prices from a selection of liquidity providers and presents the best price to Buy and the best price to Sell along with the associated source details. This then allows the consumer to identify the most efficient place to buy and sell.
  • Market Insight — The market insight function is an AI based development. The function will take the name of the coin that the consumer is interested in to return the market sentiment for a given time.
  • Atomic Swaps — The institutional client base will have a number of interests relating to Crypto trading. The Atomic swaps function will allow institutional to institutional trading or alternatively participation in dark pools of crypto liquidity.
  • Social Trading — Engaging communities through a social trading function that will allow users to follow other traders.

…and many other services, that we will be sharing details on soon

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