The Boston giant is renting a special corner of Amazon's cloud to remake Monte Carlo and do hyper-quant investing like an AI Peter Lynch, with no experience as a golf caddy.
Brooke's Note: Passive indexing is done by computers that mostly make sure that theybet on nothing but the diversity implicit in any given index of securities. It's an approach where wisdom of knowing how little you know -- and executing it with mechanical precision -- mostly beats market timing done byyounger, smarter computers, never mind smarter, or dumber, people. The passive approach now attracts the most dollars because it is cheaper andbetter, or better because it's cheaper. But it's easy to see why smart people with smart computers wouldn't want to accept this new odd reality lying down, and Fidelity's people, it seems areamong them. The logic to its FCAT quantum project with Amazonis that a tipping point back to active managers beating passive onesis bound to come alongif computers keep getting smarter. Of course, active managers eventually outsmart each other, which blunts any advantages, so it's key to be first. Fidelity Investments is trying to do just that by playing the quantum revolution.
Fidelity Investments is exploring a path out of the drab world of passive investing backto the greener pastures of active management, using a technology that, until recently, was more science fiction than fact.
That path is being charted deep within the bowels of the Boston giant at its Center for Applied Technology (FCAT). It'son a never-ending mission to find "breakthrough achievements in research and tech,"according to its website.
And, it thinks it's found one in the latest advances in quantum computing.Itpromises to revitalize active management, where the fees are fat and the returns are -- hopefully -- fatter.
Fidelity's latest research project runs FCAT-developed quantum algorithms through Amazon's Braket, arecently launchedcloudservicethatruns on three super-computers, D-Wave, IonQand Rigetti.
Quantum computers areable to solve certaincomputational problems, infinitely faster than classical computers. They havefour major potential benefits for financial firms.
It speeds up market forecasting, cryptographyand data gathering,and makes it more precise, says Fidelity head of emerging technologyAdam Schouela.
It is a quest for the proverbial quantum leap.
"We're looking for those technologies that truly have that potential to displace technologies we're using today," he says."That's where quantum computing fits in."
In August, Fidelity completed a quantum computing proof-of-concept in conjunction with Amazon that promises faster and more accurate asset pricing, investment analytics, tradingand Monte Carlo analyses.
"Active investing is in Fidelitys DNA,"says Will Trout, director of wealth management at Pleasanton, Calif.-based consultancy, Javelin Strategy & Research, via email.
"Whether supported by the boffins or cutting-edge technology ... avenues where it's still possible to outperform and get paid ... will remain on the Fidelity road map," he explains.
FCATs latest project created a security not unlike an index ETF that tracked a synthesized index in close to real time with a lower rate of error than currently possible. By further crunchingthe data, it yieldednear real-time asset pricing, inclusive of options trades.
That said, Schouelais careful to temper expectations.
"I wouldn't necessarily call it a gamble but I wouldn't call it a 'will'... as in will potentially."
Fidelity is also one of the few firms withdeep enough pockets to pull off a project like this in such a nascent technology, says Lex Sokolin, global fintech co-head at New York City blockchain software company, ConsenSys, via email.
"With mutual fund AUM over [$3.5] trillion, Fidelity is able to partner and have a meaningful conversation with [firms like] Amazon ... these are big fixed-cost projects, and technology firms need to find a use case that works for millions." See:Fidelity Investments takes another leap into the future, enlisting Amazon to turn advisors into virtual reality avatars, but some say it's pie-in-the-sky.
Although quantum computing has potential long-term benefits for the financial industry, the field itself remains closer to the whiteboard than the shop floor.
Between 1977 and 1990, when Peter Lynch managed Fidelity's Magellan Fund, he averaged a 29.2% annual return, increasing assets from $18 million to$14 billion.
The legendary investor got recruited by a Fidelity exec who saw promise in his caddy -- an approach to capturing lucrative decision-making capabilities regarded by most HR departments as too hit-or-miss in 2020.
Indeed, many of FCATs own staff have yet to come to terms with quantum computing.
The firm uses a mix of workshops and virtual reality to get its employees thinking about the "mental shift" quantum-design requires.
"Quantum computing is in the very early stages of considering commercialization," Sokolin explains.
"This hardware is important, as are its uses, but I expect the discussion to stay in innovation labs for another few years. Much of what is happening today is finding the problems that fit the types of solutions that quantum computation can provide."
But a developmental leap is in the offing, similar to the shift from hexadecimal machine code to programming in English-like script, and Fidelity intends to capitalize, says Schouela.
"There are these layers of abstraction [that have] started to form for quantum computing [and] as soon as the technology is viable, we have the ability to leverage it to the benefit of Fidelity."
Typically, the now 20 year-old FCAT spends between three- to seven-years working on a project before it gets tucked into Fidelity or spun-off.
Fidelity's ability to succeed depends on its ability to make a portfolio of bets where failure or cold storageis an option.
"We shelve stuff all the time," Schouela says. " [and] sometimes the markets not ready for something yet it's an exploration."
'Incidental' pairing
The Fidelity-Amazon quantum partnership is also the fourth time the two firms have worked together since anearly attemptat joint distribution in 2006.
In May 2018, Fidelity developed a chatbot Cora built on AWS Sumerian, a VR design tool; and later Fidelity strengthened its VR partnership with Amazon as it pursued VR advice and training systems, the latter of which are now in use.
Then, in late 2019, Amazon chose Fidelity as its new 401(k) vendor. See:Fidelity wrests high-profile Amazon 401(k) business from Vanguard.
But the two firms continued partnering is merely "incidental", rather than strategic, says Schouela, who worked on Fidelity's VR projects.
"Its completely different folks [at Amazon this time] so it is a little bit more on the incidental side were [also] actively working with lots of different people in this space."
Fidelity's ownership of the algorithm-basedshort-selling asset manager Geode -- a 2003 Fidelity spin-off -- and its stake in ESG investment manager Ethic are examples of the firm's continued interest in active-management. See:Fidelity Investments inks deal with $180-million startup.
"Fidelity, led by [CEO] Abby Johnson in this context has unlimited thirst for advantage," saysSteve Gresham, managing principal of NYC consultancy, The Execution Project, via email.
Johnson has, for example, pushed the family firm toward crypto-currency.Fidelity Investments applies its proven Peter Jubber to its unproven bitcoin unit and its launch of Fidelity Digital Funds signals it's all in on blockchain currency
Yet Amazon will win downstream, says Sokolin.
"If it can help financial firms, whether Fidelity, hedge funds, or market makers more efficiently price financial instruments at scale [for] the entire market in real time, then it can become the de facto analytics engine for financial services."
"This would again mean that technology firms become more powerful relative to the existingfinancial ecosystem," he adds.
Amazon uses neutral language.
"Our goal for Braket is to be a catalyst,"says AWS vice president for technology, Bill Vass,in a release.
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Fidelity Investments leaps back to the future in an experiment to restore active management to its lofty perch, using technology that is still more...
