Gathered on one floor of the Abu Dhabi Investment Authority’s 40-story headquarters, a group of physicists, academics and data experts huddle around whiteboards, scribbling equations and typing in tons data in state-of-the-art computers.
Many were drawn to Adia, one of the largest sovereign wealth funds in the world outside the traditional world of finance – more likely a college campus than an investment bank. But they are all part of a new team of more than 50 people who the fund says will be crucial in helping it navigate an increasingly complex investment landscape.
The fund, which is estimated to manage around $700 billion, has over the past two years built a “research and development lab and factory” in hopes that a science-based approach will make it more nimble and better able to identify and exploit market anomalies.
It’s one of the most radical shifts in thinking for a fund traditionally seen as one of the most conservative sovereign wealth funds, but one that is adapting taking into account the impact that artificial intelligence and d ‘further technological advances will have on investment.
In a rare insight, Adia told the Financial Times that there was “a feeling that many sources of competitive advantage in a rapidly changing market are very short-lived, so you need to be more nimble and dynamic to seize them. “.
Among the recruits is Marcos Lopez De Prado, a professor and quantitative expert at Cornell University, who is global head of quantitative research and development at Adia. He said having an in-house team means the SWF “can mitigate many of the pitfalls of financial research, such as . . . knowledge hoarding.”
“There are also benefits associated with building this team and the systems that support it, from scratch,” said Lopez De Prado, who was previously an executive at AQR Capital Management and Guggenheim Partners. “Creating our own abilities. . . gives us the flexibility to evolve and innovate as we see the future of markets change and develop our own intellectual property.
Other members of the team include Alexander Migdal, a physicist and professor at New York University, and Alexander Lipton, a professor at Hebrew University, co-founder of Sila Money and former co-head of Bank of America’s global quantitative group.
The team’s findings will be made available across all asset classes in the fund and Adia said it has already “generated a range of new investment ideas and put them into production with encouraging results”.
Lipton said the team would continue to grow.
“We actively recruit true subject matter experts, thought leaders in their fields, whether in machine learning, strategy development, portfolio construction, risk, portfolio implementation, digital platforms or a number of other specific disciplines,” he said.
Javier Capapé, director of sovereign wealth research at the IE University-based Center for Governance of Change, said Adia is following in the footsteps of Singaporean state funds GIC and Temasek, which also invest in more scientific approaches to fund management.
“[Adia is] exploring a lot of what comes next and that explains this talent acquisition,” he added.
The fund said the creation of the lab was part of a decade-long process of increasing specialization in bringing in “our own experts, while maintaining our ability to work with external partners”.
The fund, which was established in 1976 as a depository for surplus Abu Dhabi petrodollars, has generally been seen as an organization moving at a cautious pace.
In the 13 years since it began publishing its annual report, it has only publicly announced asset allocation changes twice: in 2012, when it lowered its weighting in developed market equities from 35-45% to 32-42% and in 2020 when it increased private equity holdings from 2-8% to 5-10% and infrastructure from 1-5% at 2-7%.
It has also streamlined its middle and back offices in recent years to improve efficiency, merged its internal and external equity teams and closed its internal Japanese equity office, instead using passive funds and external managers for that market.
Half of its assets under management are managed externally, compared to 80% in 2009, as internal teams have taken on more responsibility. Adia said it did not expect the new lab to affect its relationships with external managers, including hedge funds.
Like other Gulf sovereign wealth funds, Adia has been active throughout the pandemic, including its private equity team, which deployed a record level of capital in 2020 with a focus on Asia.
The only performance data published by Adia are 20- and 30-year annualized rates of return, which it says were 6% and 7.2% respectively at the end of December 2020.
Professor Patrick Schena, who studies sovereign wealth funds at Tufts University’s Fletcher School, said the entire asset management industry is looking for alternative data sources and analytical techniques to identify trends. which might not otherwise be obvious.
This includes social media and open source company and industry information. As public markets become more efficient with information “flowing faster”, funds need to react faster, he said.
“Structurally, we are also in a very difficult space. We are living in unprecedented times with low interest rates. With the possibility of rates rising, many of these funds will struggle to manage large fixed income portfolios,” he said. “Potentially lower future returns require you to be way ahead of that curve if you want to be competitive.”
Schena added that since Adia now invests more internally, it was not surprising that it wanted to develop new internal techniques and strategies.
“In some ways they could potentially compete with some of their hedge fund managers,” he said. “It’s also true that big, blue chip sovereign wealth funds are sensitive to what others are doing and so I see them, in a competitive sense, imitating, while trying to stay ahead.”