“It is critical to know that what we’re building is a two-sided network that has benefits both for investors and fund managers,” comments Sam Hocking (pictured), founder and CEO of San Francisco-based Imatchative.
The company has just completed (27 October 2014) its Series B round of funding, raising USD20 million. Lead investors include Wells Fargo & Company, David Bonderman, a founding partner of TPG Capital, and Empresarial de Capitales, S.A de CV, a group controlled by Carlos Slim.
Hocking is a prime brokerage veteran. He co-led Bank of America’s prime brokerage unit before it was acquired by BNP Paribas. Hocking joined the French bank to co-run its global prime brokerage division. During his time on Wall Street, a nagging question kept popping into mind: “How do I make the search, discovery and capital allocation more efficient? Science and Technology have transformed and even created industries. There must be a way to improve upon the way that this business is done,” says Hocking.
The seed was sown. Hocking embarked on a journey that would ultimately lead him to leaving Wall Street and establish a cutting-edge platform – known as AltX – that uses sophisticated algorithms to better learn about the investment biases and preferences of investors and hedge fund managers. It was a case of dragging the old fashioned approach to hedge fund allocating into the 21st Century.
“Where our approach differs is that we digitise all the information and put it into a system that allows people to make decisions faster and enhance those decisions using financial data, behavioural data and regulatory data; the aim being to create interesting enhanced insights and better decision making,” says Hocking.
Using machine code to figure out psychological triggers, learning one’s biases and preferences, is inherently unique to the financial services industry. It can already be seen today in the consumer-driven sector where giants like Amazon, Google, NetFlix etc., mine data to present end-users with tailored options; a book recommendation, even match making for example.
It is that use of machine learning and matching algorithms that Hocking wanted to introduce to the hedge fund space to create better compatibility between funds and investors.
“The way that Silicon Valley would do that is to digitise the data, create different data sets and build algorithms that give you intelligence that you wouldn’t have got otherwise. It’s taking an analogue process and turning it into a digital one, making it faster and more insightful,” explains Hocking.
The behavioural science aspect is a key feature of the AltX platform. Investors and funds are required to fill out profiles that have been designed to reveal the psychological factors that drive decision-making. Dr Thomas Oberlechner PhD is the Chief Science Officer at iMatchative. Oberlechner is a trained clinical psychologist and has built the two-sided survey that the AltX platform uses; it is, in some ways, a digitised version of a one-on-one session between psychologist and client.
“Through that process, our algorithms look at how the characteristics on both sides match up. You’re assessing people by all sorts of questions concerning their financial decision-making and then figure out which investors and funds best match up and are mutually most compatible. These assessments are not about value judgements, whether you’re a good decision maker or not, but rather about individual styles, and who might fit better together in the overall decision-making process.
“The second level to this is to measure and predict people’s decision-making in market volatility and crisis situations, and to see if their risk preferences and propensities change. Some people are steady financial risk takers; some people’s decisions change dramatically,” says Hocking.
Pam van der Lee, Chief Marketing Officer, adds that this behavioural science aspect to hedge fund allocating can, in theory, help investors reduce the number of meetings that they need to have with potential managers.
“We’re making the process more efficient and more intelligence-based. It is not replacing the human interaction element but it is making the initial exchange more meaningful,” says van der Lee. “The more you use it and the more data you give it, the better the platform is in terms of output, which is quite unique to any other solutions we see in the marketplace.”
To use a sporting analogy, if a football field is 100 yards then AltX is a way to move 75 yards up field before they decide to meet the manager in person.
“Ultimately we’re trying to match human judgment with a machine that enhances intelligence and collaboration,” explains Hocking.
The hedge fund industry has been waking to the possibilities of how to embrace Big Data more effectively. This is precisely what AltX is doing, taking in huge swathes of data and allowing the end-users to slice and dice it anyway they like into bite-size chunks. Maybe they were investing with a particular manager who, during a specific period, generated exceptional returns but who is no longer open to new money. All the end-user need do is run a comparison and they can instantaneously get presented with a list of funds that they could invest with today.
This is how business intelligence can benefit the financial services industry; not just for investors and funds but for consultants and prime brokerage capital introduction teams keen to attract stickier money into the hedge funds space.
It is also particularly encouraging for smaller, mid-sized managers. Where once they might have been overlooked, technology solutions like AltX have the power to bring them into clear view with investors. That has to be a welcome development.
“Our platform is helpful to intermediaries and consultants. Their value-add is that last 25 yards where they can help their clients make the right choice. They need tools and they need the data to be digitised to generate the necessary insights,” says Hocking, adding that additional asset classes like mutual funds and PERE funds will be supported going forward.
Hocking has built a multifarious team that follows an inter-disciplinary approach. It is, in his mind, critical to tackling the capital allocation challenge. The firm has a rich group of PhDs in mathematics, physics, engineering and psychology – the Brain Trust – and has established a formidable academic network with the likes of Harvard, London Business School, Cambridge and Stanford “to help us think through innovation, data science, algorithmic work, behavioural science work etc,” says Hocking.
So what drives Hocking? What get’s him out of bed every morning?
“It’s a space I know really well. I wanted to make a contribution to change and enhance the process of connecting investors with funds. My desire is that in a few years, people will be referring to the AltX platform as the Google or the Amazon of financial services.
