Seeking and Finding Alpha – Will Cloud Disrupt the Investment Management Industry?

Today, one typically pays investment managers a percentage of assets under management. What if, instead, we pay investment managers for performance? That is the vision of startup Alpha Modus. Alpha Modus has developed new investment tools that leverage cognitive cloud capabilities from IBM Watson to help investment professionals beat the market. The experience of this almost two-year-old company exemplifies how one can rapidly realize business value using the cloud.

Alpha Modus was on stage at the IBM Interconnect 2016 opening keynote. The startup believes that we should pay investment professionals for performance, or alpha. What is alpha? Alpha measures investment performance relative to a market index. An investment with a positive alpha has outperformed the market.

Seeking Alpha
Investment managers seek alpha but, over the past few decades, fewer and fewer have realized it. According to research by Larry Swedroe and Andrew Berkin in their book, “The Incredible Shrinking Alpha”, roughly 20% of active managers generated alpha 20 years ago. Today, however, only 2% achieve statistically significant alpha. Considering those statistics, the investment management industry is ripe for disruption.

Finding Alpha
Can Alpha Modus help us realize alpha? The startup’s premise is that they can do what assets managers can not, sort through all the noise. They believe alpha-generation is a complex data problem. They team data scientist and engineers with machine intelligence. Together, they look for alpha by identifying cognitive biases in market behavior.

Alpha Modus has created is a marketplace of investment technologies that they call “mods”. The mods are priced based on how much alpha they generate. The premise is that we should pay for performance, or for the alpha component of an investment’s return.

One example of a mod that uses IBM Watson is the Early Look Imbalance Meter, which aims to predict the direction of the NYSE into the closing auction. That mod gives investors insight into sentiment of brokers on the NYSE floor.

Alpha Modus Early Look Mod

Furthermore, they leverage IBM Bluemix to supplement that information with IBM’s Insights for Twitter service.

Alpha Modus Twitter Sentiment Analysis

Closing Thoughts
Alpha Modus’ story epitomizes a big reason why I re-joined IBM. It is exciting to see how people can create new and disruptive solutions. IBM has invested in Watson and a broad set of PaaS offerings that can help people create new services. As Alpha Modus has shown, a small group of innovative people can more quickly create value that ever before using the cloud.

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