#32 Pathmajan Rasan - SmartRiskAlpha

The Nalu Finance Podcast

In this episode of Nalu Finance, we sit down with Pathmajan Rasan, to discuss how the SmartRiskAlpha technology helps investors and investment managers to consistently achieve better performances.

In this interview, we discuss:

• How to time exposure to Risk Premia.

• A way to combine quantitative models and discretionary management.  

• Examples on how to reduce volatility and draw downs while maintaining positive returns.

• His experience incorporating ESG data into the investment process. 

🎧 Listen Now On: Apple Podcasts | Spotify | Youtube | Podomatic

Pathmajan Rasan is the CEO of SmartRiskAlpha.

🎙️ Transcript:

Stefan Wagner: 00:42 I'm here today with Pathmajan Rasan, founder and CEO of SmartRisk Alpha. Thank you very much for taking the time to talk to me. I would like to talk to you today a little bit about SmartRisk Alpha, something that's close to your heart and you founded as a company, but what in the first place actually motivated you to establish SmartRisk Alpha?

Pathmajan Rasan: 01:04 I think to explain that I might have to go a little further back. I've been developing and trading systematic strategies now for 35 years. And if you want to make above average returns, then you have to be a bit different from the crowd. You have to be better than the crowd. And you have to be also systematic because once you've got the edge, you've got to be able to make the returns on an ongoing basis. So if you want to survive for a long time, you have to be systematic too.

And so in order to do that, I actually developed an analytical framework where I could have access to all my data, all my analytics, so that I could quickly test ideas and then to take it to strategy level and then to be able to execute it. So that was my kind of way of thinking and way of leapfrogging ideas. And I started that at Salomon Brothers back in the 90s. And then the first hedge fund, I rewrote the whole thing. Second hedge fund, I rewrote the whole thing. Third, I did the same. Then at Brevin, I did the same.

And then more recently at PJ. And so every time I rewrote it, it became more and more advanced to a point where right at the end, I was able to virtually create any rule-based strategy quickly and to be able to take it right up to being able to be executed. But the problem was, I mean, by then, you know, I had 35 years of this. And then before that, I was a civil engineer for six years, and then I had an MBA for two years, and about 40 odd years. I mean, that's about time to kind of plan your exit, you know. But then there was this technology staring at me and saying, you know, what are you going to do with me?

Stefan Wagner: 02:49 With all that knowledge accumulated.

Pathmajan Rasan: 02:51 Exactly. It was such a powerful thing. So what I decided to do was to open it up to others to be able to use it and for me to kind of help. And so really moving from being a player to being a coach. I mean, it is a commercial venture, but it's also an intellectual journey to help others. And at this stage of my career, it's a perfect thing to be doing.

Stefan Wagner: 03:15 That's very, very noble of you, but I appreciate that. In a sense, what are sort of the top, if you want to, I mean, I'm sure there's many benefits of Smart Risk Alpha, but if you want to have to break it down, you know, humans, we're very good at what are the top three, what would you say they are?

Pathmajan Rasan: 03:30 Yeah, so now that I've developed this technology over the last couple of years for others to be able to use, professionals of your caliber would be able to create sophisticated investment strategies using underlying securities and then to be able to trade it digitally. And so the initial thing, I suppose, is solutions, because it can be those who are providing solutions to be able to create strategies for their investors.

Or if you are a, you know, kind of advanced institutional investor, you could create your own, have more control over what you create and to be able to trade it. So that's kind of the solution side of it. Second, I would say innovation. All of us have a certain expertise and we go through life kind of operating within that framework. But innovation is when you see something that you hadn't expected to see, some other kind of angle. So what Smart Risk Alpha does is it gives you a very powerful second perspective. And so then when you look at something from that perspective, as well as from your own perspective. You might see something that you may not have seen before.

Stefan Wagner: 04:45 You didn't notice before, yes. That's right.

Pathmajan Rasan: 04:46 So you can then kind of develop it and this enables you to kind of then develop that idea and create it into a potentially a winning idea. You know, I originally built this for my framework, for me to be able to think. So the way I've kind of designed it now is that the framework can be used by others to build their own way of thinking using this so they can personalize it and grow with it so that they have a second perspective that is very powerful that they can work with and build on it.

Stefan Wagner: 05:17 Yeah, I think personalization, particularly in the investment industry, is a big, big trend. Funny enough, it started in media, you know, your TV station, now you have Netflix and Spotify. Now, you know, it used to be everybody had to go all in the one big funds because it was the cheapest way. But because of digital solutions, you can now personalize and give exactly clients the kind of risk return they want to. Which leads me actually to my next question is, you know, everybody talks about risk. And I always like to ask people, what is your definition of risk? Or how do you measure risk?

Pathmajan Rasan: 05:51 So within a portfolio context, risk is multidimensional, right? I think you have the sector risk, country risk, leverage. So in a portfolio, you need to be able to control that so that you don't have any kind of shocks, as it were. But overall, I mean, you know, from an overall risk point of view, you know, volatility has worked out just fine for me, you know, in terms of, you know, it's a relatively simple measure, but it's a very effective measure.

And I've used that for sizing trades, you know, with risk parity or something like that, or then also assessing what the performance of trades are like. So that's what I've done. The other risk, I would say, is, you know, we'll talk maybe later about diversification, but, you know, how we can have uncorrelated assets together. But how these uncorrelated assets work in distress is quite important. So that is something else that people should be aware of and be taking care of when they construct portfolios so that they're not disappointed in bad times.

Stefan Wagner: 06:58 Which sort of leads me to my next slightly cheeky question, I have to say. There's always the argument, I'm investing, what you're doing is speculating, and what you're doing is betting. But nobody really can often explain to me if there actually is a distinction or if it's very personal. But I always like to ask, do you have a distinction with people who are saying, this is investing, this is speculating, this is betting?

Pathmajan Rasan: 07:23 Good question, actually. OK, so let me just think. I would say that speculating and betting is maybe a low probability bet with a high expectation of…or expectation of a high return. So you are, you know… Big odds. Big odds, that's right. That's a good way to put it, yeah. Whereas with investing, you are looking to take at least above 50% average bet and it has to be accompanied with maybe an investment philosophy, an edge, a way to capture it as strategy and risk management and so on. Because investing, if you want to survive in the longer run as an investor, then you have to have all of those things. And you're really building returns brick by brick in order to kind of get there. You know, there isn't a free lunch as an investor.

Stefan Wagner: 08:25 This is probably one of the best ones I've ever heard here so far.

Pathmajan Rasan: 08:27 Thank you. As far as betting and speculating is concerned, in some cases it is done for excitement. But in some cases it is because that is all that professional, typically it's on the retail side that I've seen mostly of this. And because that is all they have to bet and kind of take an investment bet on. So I'm actually, you know, one of the things I'm looking to do with this is to roll out a kind of a course on better investing right from data right up to execution, a kind of a course, together with a retail version of this technology so that people can actually you know, take bets that have better odds because after all they are working with, you know, they're spending their own money doing this and so it's very important that they make the right decision. So that's something I'm planning in due course.

Stefan Wagner: 09:20 Excellent. Obviously reducing risk is always a common goal for investors and often, you know, I have these conversations with people come and want an investment strategy and other things and saying, you know, It's all very nice, you're telling me it will outperform the index by 3%, but I might not even need this. I would rather have less drawdowns, for better or worse, because that's usually when I, as an investment manager, often get a lot of loose, potentially, capital. People don't want to hang in there when they see big drawdowns. So I would rather swap performance, outperformance, let's say it that way, versus drawdowns or minimize the volatility. That's something Smart Risk Alpha can help us as well, if I understand it right.

Pathmajan Rasan: 10:03 Very much. So, this goes to the heart of diversification, doesn't it? Because you may have a fantastic… I don't know how long this is going to take actually, but back in 92, I, you know, so I had, I was in the equity strategy and, you know, and Salomon were, you know, so, so into prop trading and… It was basically a hedge fund. It's a glorified hedge fund, wasn't it? And so this was the first time I was beginning to create content. In a very short space of time, I'd come up with a value strategy built on Excel.

So I took it to the prop trading desk and they said, yeah, we'll give it a go. And, and they put it on and it didn't perform that well in 92. And then, so after three months, they cut it. And then I went back, and then later I produced, you know, two or three years later, I came up with a multi-strategy portfolio that was very successful. But the thing about value was that after 92, it had an amazing run, you know, and so, you know, had they held it on a little longer,

Stefan Wagner: 11:12 But isn't that quite often the strategy that when you put them the first time in place they don't perform and then suddenly they perform really well?

Pathmajan Rasan: 11:19 It could. I mean it's timing. We don't give enough credit for luck. I mean luck plays a huge part in our successes in general and also in investing. So the thing about this was that had it held longer, it had performed. I would have become a value investor. And had I become a value investor, I would have had a glorious run until about 2015-16 and then I would have finished. End of career. Because it's just one idea. It's a brilliant idea. So fortunately, I did a multi-strategy, as it turns out. And the nice thing about multi-strategy is that diversified.

When something is doing well, something else is not doing well. So to be able to diversify your ideas is a very important thing. And to look back at times when things have had big drawdowns, and then what about some strategies that haven't been, have performed well during that time. So one of the things that Smart Risk Alpha does is provide a huge range of strategies, hundreds of strategies. When you apply it onto different geographies, it comes to almost like thousands. And so it gives investors the opportunity to be able to look at strategies. So they have a holding. They look at strategies that may be least correlated to them, that has performed well during the past drawdowns. create a portfolio out of that and for them to trade it. So that's really one of the ways that it can be done.

Stefan Wagner: 12:46 Excellent. Something that's, you know, has been becoming more and more visible and discussed and important for many investors, ESG. And, you know, ESG investing can definitely address social environmental issues. And I think even things like, you know, if people are happy at the company they work, Is it measurable that there's a positive impact or is it because just money has to be put into there or what's the challenge with ESG in a sense to actually maybe it's difficult to measure as well?

Pathmajan Rasan: 13:20 Yeah, so I have taken a look at some established data sets for ESG from a systematic standpoint, first of all. And I haven't seen any discernible return generation out of that data. But then, you know, it is to an extent to be expected because ESG data, the history is not that long compared to systematic, and the history is also varied. You know, I think the way it is measured today, ESG is not as it was before, and it's been kind of backfilled and so on. So there's that issue. And the third thing is the data doesn't vary that much. I mean, you know, if something, if a company is, you know, low carbon, and then, you know, there has to be a new piece of information for the price to change. And so from a systematic standpoint, I can see why it doesn't actually work.

But ESG is a very important consideration. I mean, in many cases it's mandated and there is a huge reason why investors are very keen to have ESG funds. So our solution is to combine ESG with return generating strategies. So for any of the ESG positions that the investor is interested in, for them to be more overweight the longs and be underweight the shorts, for example, or long short in situation. But to combine that with return generating strategies. So then you have performance. One of the risks I feel with ESG is that if you simply go on purely ESG data and the funds don't perform, investors can get bored with it or even disappointed with it.

Stefan Wagner: 15:08 Frustrated and cynical actually to a certain extent. Now, you mentioned earlier you have been doing this for quite a while. Is there something you could share? What has been your most significant learnings in the investment industry 35 years before you became, maybe also when you were a civil engineer.

Pathmajan Rasan: 15:29 So the thing is, it's been a bit of a freakish career actually because although I've worked for big organizations, I have been able to control what I developed. I worked in small teams, I was able to follow my passion and kind of do stuff. And so I ended up And also when you run a small fund management company, I've done every job in fund management, and then I've pretty much worked on every asset class, and I've done quantitative, discretionary, and quantum as well. So one of the powerful things about that is I'm able to relate to pretty much anyone in the fund management industry, which is a lovely thing to be able to do.

But also, you know, it kind of helps with a technology like this because you are able to kind of bring all of that into play in order to kind of provide the best possible thing. Yeah, so it's been a brilliant run, actually. But I think in terms of longevity, I would say for the younger people who may be interested, is learning, continuing to learn the next big thing and to be able to read that. First, self-learning is very important. And second, to be able to reinvent yourself, because change has been fast in the past and is going to be even faster I think going forward and so knowledge and learning and that attitude to learn I think is going to be key for people.

Stefan Wagner: 16:55 Is there also something maybe you can tell us about yourself that most people don't know? I would have, all the things that you said here, maybe because we know each other, but I would have.

Pathmajan Rasan: 17:04 That's true. That's true, actually. And also, you know, and yeah. So the thing is, I mean, you know, I play cricket. And one of the nice things about sticking around this long is that a lot of people fall away. And now I'm playing for the county, for the senior side. And I feel if I can stick around and first of all stay alive and then to be able to fit enough to play, when it comes to over 70, I think I could be playing for England. I'm going to root for you.

Stefan Wagner: 17:35 I'm going to come to that game, definitely.

Pathmajan Rasan: 17:37 So that's one. And the other thing I'm looking to do, this is a little bit like the speculating we talked about earlier, is to write a hit song. In fact, now that I know that you are a bit of a music buff yourself, I'm going to be talking to you a bit later.

Stefan Wagner: 17:57 Going back to the financial industry, looking forward, what sort of trends and challenges do you see for the future for the industry? I think you touched on a few things.

Pathmajan Rasan: 18:06 At the moment I feel, I think it's struggling with legacy technology to some extent. I think there is too much marketing and I think there is too much commoditization in my view.

Stefan Wagner: 18:18 Maybe the commoditization also comes because it's such a highly regulated industry and if you stay in your lane for better worth and don't innovate, you're safe.

Pathmajan Rasan: 18:28 Yeah, well, that is what is being rewarded at the moment, I think. I mean, I mean, clearly money chases after success, and that might well be the case. But I feel, you know, if return generation is your thing and investors should be focused on that, then, you know, leading edge technology, you know, we have been a brilliant technology these days. The technology would be good. More engineering than marketing, more customization than commoditization would be good.

And, you know, so that is how it is. And partly was excited about Smart Risk Alpha was. You know, it kind of fitted where we are heading as well. You know, we have the technology today to be able to have the kind of customization I've been talking about. And my prediction is that in five years, what we've been talking about today with Smart Risk Alpha and the way you can do things digitally will be mainstream, is my prediction.

Stefan Wagner: 19:24 If I would be a betting man, I'd take that side of the trade as well. Great, thank you very much for taking the time for everybody who's listening and liked what they hear. What is the best way to get in touch with you?

Pathmajan Rasan: 19:39 LinkedIn probably is the easiest and I'll be happy to connect and then we can communicate. But also our website is smartriskalpha.com. That's another way to get through to me too.

Stefan Wagner: 19:50 Perfect, thank you very much. Great, thank you Stefan.