The Ledger
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Bonafede: Only reinforcement learning can dynamically moderate portfolio risk
“As it learns to maximize the reward, the model, I don't mean to give it human characteristics, but it will moderate risk because it can see that taking full advantage of the underlying patterns may not lead to the best reward, and there's No other optimization…”
Bonafede: Traditional investment processes fail to justify active management fees
“If you think about how rudimentary the other processes are that literally trillions of assets are invested in, at this point in this seat, I'm not quite sure why everybody feels so comfortable with their current frameworks. Because again, you could index and p…”
Bonafede: Most institutions cannot simply index their portfolios
“Jack Bogle had a view of Really, you should index everything, and over the long term, you'll get there at much lower fees, and everything will compound, but the reality is, is that most institutions can't invest that way for just by their very structure, or by…”
Bonafede: Peer group benchmarking is consultants' biggest disservice
“Probably the biggest disservice that consultants have ever done is putting everybody in peer groups so that they compete against each other, even though that their liabilities are completely different and their circumstances are very different.”
Bonafede: The active fixed income business model is in trouble
“So how do fixed income managers actually charge active fees on top of duration risk and low yields, where investors are going to be looking at most of their portfolios, and you're earning close to zero, and on a real basis, you're earning negative. So that who…”
Bonafede: Asset management must undergo a major structural correction
“In my view, portfolio, the asset management industry is really has to go through a big correction before any of this will shake out, but you've seen unprecedented mergers and acquisitions.”
Bonafede: Traditional factor models leave substantial returns on the table
“The traditional way of measuring relationships really leaves a lot of information on the table. You're either describing a small portion of that return, or you're just building portfolios that don't have, aren't dynamic in terms of how those relationships chan…”
Bonafede: Quantitative factors are spurious because timing them is impossible
“Now we all know that factors are spurious, but that's because they appear and they disappear at certain times, and you don't know exactly when to make that bet.”
Bonafede: Business schools still teach static linear models for portfolio construction
“All of the skills that are being taught are based on modern portfolio theory, which all of those, nearly all of those equations are in an APT framework or a linear regression framework, and even traditional optimization methods used for portfolio construction.…”
Bonafede: Traditional quant managers faltered in March and April 2020
“If you see how they performed during March and April, 2020, they faltered with all of the other quant managers and the products that they were selling to clients.”
Bonafede: The 2020 quant breakdown would have worsened without Fed intervention
“Had the Fed not stepped in, you probably would have seen the true aftermath of what Can happen with concentrated investments in the same kind of relationships in the same kind of data.”
Bonafede: Every investment fundamentally reduces to lending or owning
“When you put a portfolio together that there is hidden beta in everything because everything is either the pure stream. You're either Lending or your owning, right? And then you put a lot of complication around those two concepts in whatever you're structuring…”
Bonafede: Pension funds move like icebergs, taking years to adopt ideas
“Pension funds work like icebergs. Okay, so you might start the concept and then many years later you might get to where you actually get movement. And so understanding that you can't have instantaneous decisions and outcomes with clients, especially clients th…”
Bonafede: Consultants enter OCIO to capture asset management profit margins
“Consulting today, that's why you've seen a lot of consultants go into the OCIO business because they need to find a business that has asset management margins because you really can't scale the business.”
Bonafede: Deep reinforcement learning discovers relationships traditional optimizers miss
“But in a deep reinforcement learning process, you're using that neural network, and it has the ability to learn new relationships where all other optimization functions will only use the parameters or the factors or the framework that the model itself is capab…”
Bonafede: Allocators typically sacrifice returns to diversify risk
“There are many allocators who have an absolute return component of their portfolio. You're, Typically trying to diversify risk with that allocation, but you end up sacrificing return in the process.”
Bonafede: AI investing will stay in absolute return before going long-term
“I think it's going to have to stay in places like absolute return, because really what these models are capable of, there's going to take a lot of research, but they're shorter term right now. Eventually the research will change to longer term.”
Bonafede: High onboarding costs hinder allocators from backing emerging managers
“I think it's difficult to onboard a manager in general, so I think probably the biggest hurdle to overcome is when we're an emerging women-led manager, so there's a lot of assets that are looking for opportunities to be able to help firms like us grow. However…”
Bonafede: Emerging markets did not open to US investors until 1992
“The emerging markets didn't open up to U.S. Investors until 1992, and so being able to be on the forefront of that and run that business essentially for a few years really gave me a huge view as to how non-U.S. Investors and U.S. Investors looked at investing”
Bonafede: Rosetta Analytics uses deep reinforcement learning for portfolio optimization
“So in our case, we use neural networks to make a directional prediction, but we have actually taken the neural network and we're using a concept called deep reinforcement learning, which is, you can think of it as a decision framework, but an optimization that…”