Fairmat, the Italian provider of derivatives pricing and structured product analysis, has launched a quantitative framework aimed at improving the actual structured portfolios construction techniques used in the industry.
Currently, the construction of structured portfolios is usually performed empirically by experts or by the means of heuristics, according to Matteo Tesser (pictured), PhD, CEO and co-founder at Fairmat. "This is mainly due to the several implementation challenges staying behind the construction of a quantitative implementation," said Tesser. "[That is why we have] developed a quantitative framework for testing risk / performance profile of any structured products allocation."
According to Tesser, the increased focus on compliance and transparency has resulted in wealth advisers having difficulties in including structured products in client's portfolios. "In addition to regulatory restrictions, advisers are not able to assess the combined joint risk-reward profile of clients when they have structured products in their portfolios and for this reason they gave up," said Tesser. "However, our tools can help them to reconsider structured products."
Our accurate terms/payoffs database, the availability of market data and the expertise spread on our team provided us all the ingredients to
Testing the risk/return profile of a portfolio allocation requires the joint simulation of the underlying risk factors (which could be performed with Monte Carlo based forward looking methods or with historical based bootstrapping methods), and the mapping of the nonlinear relationships between the risk factors and the products payout (which can be derived from term terms data), said Tesser.
"As you may notice these types of analyses require a lot of market data (underlying history, issuers credit scoring, terms information), plus robust simulation models and computational power," said Tesser. "We have bundled this framework into the Fairmat Cloud platform within our new portfolio designer tool which enables users to assess given structured products allocations or to generate products allocation proposals (or rebalancing proposals) for different risk aversion levels just by specifying design goals, as it happens in shares/funds asset allocation packages."
The value added of structured products portfolios is considerable and robo-advisory distribution cannot be ignored, said Tesser. "We have prepared a web service API for our new service, and we are open to any interested player in the robo-advisory segment," said Tesser. "The aim of the tool is helping the management of structured products portfolios, and hence targets funds managers who want to implement investment in structured products and advisors who want to work with structured products. We think that issuers and distributors could benefit of our tool because it would help them to generate risk/reward reporting for combination of structured products and market them."
Fairmat's structured products portfolio designer tool will provides "efficient portfolios" starting from simple inputs such as the initial selection of products, the allocation budget, and the preferred risk measure, said Tesser. "Every other detail is handled by the platform including market data and the access to a curated database of retail products and the possibility of autonomously mapping custom OTC products," he said.
Fairmat calculates the risk/return profiles for more than 9,000 structured retail products on a daily basis providing useful information to fund managers, IFAs and investors through the firm's product comparison services and product testing reports, according to Tesser. "We are aiming at including more than 20,000 new products by the end of this year," said Tesser.
The new tool responds to market demand for structured portfolio construction and analysis tools, and complements the firm's existing offering around structured portfolios' fair values and Greeks monitoring tools.
The new service is available via the Fairmat Cloud platform which features with a pay-as-you-go mechanism "in which users can start to use the platform gradually and are billed just for the valuations they request".
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