Data analysis driven by machine learning is generating as much as 50 per cent of alpha in certain equities strategies managed by Pictet Asset Management, according to its head of quantitative investment David Wright. 

At the Top1000funds.com Fiduciary Investors Symposium, Wright said AI will not only provide drastic efficiency gain for traditional stock pickers but also will be a defining part of “quant 2.0”. 

“The arrival of machine learning in the quant space is not a revolution. It’s a part of a much longer evolution in the requirement for more data, more technology, and more computing speed,” he told the symposium in Singapore.  

“It was the early 2010s when machine learning was first looked at by quants, predominantly as a way of analysing new types of data or text documents with natural language processing. 

“This was done in response to the crisis that happened in the quant industry at the underperformance of a lot of traditional risk premia. 

“Today, quants are using a variety of different machine learning strategies to support our investment processes.” 

Wright said Pictet has been running AI-driven long/short and long-only strategies for several years, which currently manage $2 billion. They have a machine learning component to make short-term stock forecasts. Its process consists of data preparation – such as determining what data points to use and defining the target – then model training and prediction.  

He explained that the so-called “conditioning” element of AI-driven quant, which analyses and acts upon the interaction of different non-linear data points, is what sets it apart.  

“[It’s] almost rules-based, like don’t follow an analyst upgrade at this point because the stock is heavily shorted and it’s near to its reporting period,” he said. 

“That conditioning piece is what you don’t get from a traditional quant model. 

“That’s probably generating 50 per cent of the alpha that we’ve seen, that’s consistently between long-only and long/short, and we see it pretty consistently quarter-on-quarter as well.” 

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Machine learning is also helping to overcome another key quant-investing challenge in the trade-off between a model’s complexity and its accuracy. Wright highlighted that traditionally, overtly simple or complex quant models both run the risk of reduced accuracy, as they either have too little information to make an accurate prediction or become over-fitted for the ultimate investment process. 

“With linear models, what we spend a lot of our time doing is trying to work out where the bottom of that U [shape] is,” he said. 

“Now machine learning offers the potential that we don’t have to spend the time looking for that optimal point.” 

Staying ahead of the game

However, Wright said in response to a question from the audience that it is very difficult to “build a moat” in AI-driven quant investing.  

“I don’t think we have a data source that no one else has. I don’t think we start with an algorithm that no one else could use. I don’t think we have an implementation that no one else could use,” he said.  

“In the same way quant has always been, if you’ve got to a point that there are people following you, you’ve got to make sure when they get to where you are, you’re not there anymore. 

“You continue to add more data, continue to refine your algorithms, continue to refine your implementation. 

“I think it’s trying to make every single part of the process as effective as possible, but don’t be naive and think [in] any one single part of it, no one else could do well.” 

This also provides considerations for asset owners in their manager selection process if they are thinking of tapping into AI-driven quant strategies.  

When this happens, Wright said they are in search of five key things: pure alpha stripped of any common factor effects; active returns that are independent of market regime; strategies customisable according to their needs such as risk level or ESG; strategies that are implementable in different ways; and data transparency. 

Different manager models have different pathways: for example, what type of learning does it use? Is it supervised learning? What are they forecasting? Are they going to be economically driven or data driven?  

Wright encouraged asset owners to understand exactly what they want from the strategies.  

“A lot of the decisions that you make as humans start to send you off in different directions,” he said. 

 “It gives me a lot of comfort that even if you take the same starting point, you’re not going to get to the same place as a lot of your competitors.” 

For more than 20 years, the investment environment has been markedly friendly, with markets boosted ever higher by accommodative monetary policy, unimpeded trade between countries and a relatively benign geopolitical backdrop.

But with trade wars – and real ones – now sweeping global markets, the asset owners that ply them for returns might have to rethink their strategies. 

“If we look at the Australian superannuation funds, a lot of them have got a very risk-on approach – 70/30 [growth/defensive split], or more than that,” Yue Cao, principal for strategy and planning in the office of the chief investment officer at the $216 billion AustralianSuper, told the Top1000funds.com Fiduciary Investors Symposium in Singapore.

“If you take more risk, you’re more concentrated in the US, and you’re getting a pretty good deal. But now the risk mitigation, the downside protection, is probably more front and centre.”

But the timing and magnitude of portfolio changes matter, Cao said, and asset owners have to block out the short-term noise – like the constant stream of headlines generated by the Trump administration – and be open to new information in order to make decisions effectively.

“Given that it’s a lot of change, we don’t want to pretend we know everything; we have to build, relentlessly, this openness and agility in our decision making and take on different perspectives,” Cao said. 

“How do you make sure that different voices, those unwelcome voices, get a place in the decision-making? Asking the right questions gets you a better result than defending the answer you think is right.

“But what’s exciting for me is that the next 10 years are going to be a much more exciting period than in the past. It’s more difficult, but we will see more diverse approaches to deal with those things.”

Investor anxiety

John Greaves, director of fiduciary management at the $42.2 billion defined benefit pension fund Railpen, echoed the sentiment. Railpen is still targeting high levels of return and wants to take on illiquidity risk, but has the growing sense that the “portfolio is perhaps not well set up for the coming decades”.

“Probably like a lot of portfolios, if we’re being realistic,” Greaves said. “But the challenge is, what do you do about that? We’ve been very reliant ex-post on the equity risk premium, and that’s mainly come from the US, and in previous decades it’s come from other parts of the world. So we have about 40 per cent of our assets in the US, but it’s about 70 per cent of our equity risk across private and public. And the rest of the portfolio tends to be more secure credit, real asset, government bond type assets. It’s consuming a lot of our risk and it’s a key driver for us.”

So Railpen could geographically diversify its portfolio, or bring new assets into it – which it’s been doing, with the addition of more credit, real assets and diversifying strategies. But that might not be enough, Greaves said.

“What if assets just generally across the board are not going to be delivering the returns, or at least the real returns, that you need?” he said. 

“I’ve had a lot of conversations on what a more dynamic, nimble process might look like, in terms of trying to read the tea leaves of what’s priced in and what’s happening now that’s fraught with risk. So how do you systematise that and build it into a reliable process? But it might be a requirement of the world we’re in.”

That world is probably one where there are more macro shocks, Greaves thinks, driven by the changed policy responses of central banks, economic protectionism and geopolitics – and asset owners will have to spend more time thinking about non-financial risks. Aaron Bennett, CIO for the $11 billion University Pension Plan Ontario, agrees.

“I love thinking about geopolitics, though in the 25 years I’ve been in finance I’ve often viewed it as idiosyncratic – something I can avoid,” Bennett said. “And one of the things that has really hit home with me is that the geopolitical risk that we’re experiencing does have the potential to be systematic and not idiosyncratic, and that’s quite scary, and does cause you to think differently about your overall portfolio and your exposures.”

Portfolio trend

But the economic disruption started by the Trump administration could also have a hopeful element.

“There’s the idea of galvanisation, and what the opportunity is around that for my own country, Canada, and for others. And we’ve seen what used to be considered politically impossible in Germany look like it’s actually going to happen, and I think about other countries where that could actually happen.”

And there are other shifts to reckon with – like the switch more and more asset owners are making away from strategic asset allocation and towards the total portfolio approach (TPA), which has become increasingly popular and has found advocates and users in the likes of the Future Fund, NZ Super and GIC. According to June Kim, senior investment director at the $350 billion CalSTRS, it seems like “everybody’s doing TPA, or moving towards it or thinking about it”.

“And what is TPA?” Kim said. “Everybody has a different interpretation or way of implementing it.”

“I started to worry a little, because is this an area where the alpha is going to dissipate because everybody’s doing it? I don’t think so, because it’s a process and a philosophy rather than an investment strategy. We’re in the process of trying to implement a more centralised lens – we’re calling it total fund management.”

Following the appointment of new CIO Scott Chan in 2024, CalSTRS is currently assessing the risks and resiliency of its portfolio across public and private markets to see if there are “any big gaps”.

“The recommendations that come out of this in the next couple of months will lead into potential asset allocation shifts as we go into our every-four-year asset liability management study and the prep work for that,” Kim said.

“Anything would be at the margin given the size of our portfolio. But one of the areas we’re looking at is the defensive bucket. We have a 10 per cent allocation to risk mitigating strategies. Their whole purpose is to be a hedge to our growth exposure and that’s a large chunk of the portfolio, so part of this exercise is to see what’s the right sizing of that.”

CalPERS has hit back at criticism from a coalition of environmental advocates and public sector unions, California Common Good, that its flagship $53 billion sustainable portfolio which it hopes to double to $100 billion by the end of the decade includes a $3.5 billion allocation to many of the world’s biggest polluters.

The organisation used public records, including filing a California Public Records Act request, to highlight that CalPERS’ climate adaptation, transition, and mitigation investments include holdings in 52 of the world’s largest greenhouse gas emitters. The report aims most of its criticism at CalPERS’ inclusion of seven oil and gas companies in the portfolio.

“Unfortunately, the report raises unfounded concerns that CalPERS isn’t serious about addressing climate change. Even worse, it could be construed as suggesting that CalPERS is intentionally misleading its 2.2 million members and the public about the intent of our climate investing program,” said CEO Marcie Frost in a statement.

Problems in Solutions

CalPERS does indeed classify a small proportion of its investments in oil and gas companies as providing climate solutions, confirmed Peter Cashion, managing investment director for sustainable investments, speaking during the investor’s mid-March board meeting.

Specific business lines at these companies amount to $67 million worth of investments in activities that qualify as climate solutions like developing green biodiesel, carbon capture technology and sustainable aviation fuel.

CalPERS measures portfolio companies’ green business activity using a taxonomy that tracks climate solution investments across three categories – mitigation, adaptation and transition. Under the transition umbrella, Cashion said it is possible for high emitting companies in hard to abate sectors to qualify as providing a climate solution if they have transition strategies that support pro-climate activities.

Using this approach, CalPERS values 1 per cent of its $234 million Saudi Aramco holding as a climate solution, for example. Elsewhere the investor classes its $12.6 million investment in Indian coal giant Adani Group’s Green Energy subsidiary as a climate solution.

CalPERS uses a variety of globally recognised data providers to measure companies’ green activity including Financial Times Stock Exchange, HSBC and MSCI and Blomberg. The CalPERS team have sought out best practices supported by the Institutional Investor Group on Climate Change (IIGCC), the EU Sustainable Finance Disclosure Regulation (SFDR), and the European Securities and Markets Authority (ESMA).

Cashion said the allocation reflects CalPERS belief that “a green asset is a green asset regardless of corporate ownership” whereby even if a green asset sits on the balance sheet of an oil producer, it is still viewed as green.

He also reiterated the importance CalPERS places on engaging with oil and gas companies to promote sustainability at these corporations. Witness how CalPERS $5 billion allocation to a Climate Transition Index underweights oil and gas companies with no transition plan.

Frost said that CalPERS’ approach to assessing climate solutions has been iterative in a reflection of the emergence of best practices and additional data. “We wish things were easier. CalPERS has long supported clarity and consistency in climate investing definitions. We reject any suggestion that our methodology wasn’t well researched or independently authenticated,” she stated.

She also reiterated why CalPERS does not support climate divestment, something she called a “a symbolic act that not only ignores the value of climate transformations and investor engagement, but a possible breach of our fiduciary duty as required under the California Constitution.”

Her response underscores the challenges investors face balancing financial returns with their climate commitments. CalPERS believes that its influence can push polluting companies toward greener practices and support funding clean energy technologies. Yet transition progress is slow – and remaining invested is an essential return stream for CalPERS 2 million beneficiaries.

California Common Good also called for more details on the private equity, private debt, infrastructure and real estate holdings CalPERS classifies as climate solutions. The lobby group said this was particularly important given CalPERS has announced plans to increase private holdings to 40 per cent of its portfolio.

Investors are operating in a period of “profound uncertainty” characterised by more volatile inflation and real economy activities, as well as unpredictable policy impact, according to GIC chief economist Prakash Kannan. It is intrinsically different from anything investors have lived through in the past few decades, and for some their entire investing lifetimes.  

This means asset owners can no longer take existing assumptions about the investing environment for granted, including the relatively unconstrained ability to move capital across borders, trust in contracts and a peace dividend.  

Prakash, who is also GIC director of economics and investment strategy, said these uncertainties will challenge asset owners’ investment models. For example, he suggested organisations incorporate more agility and inflation risk management, in expectation of a new inflation pattern that is more “spiky” and “episodic” in the future.  

“I think where most people…misunderstand is that a regime of high inflation doesn’t mean that inflation goes from two [per cent] in the past to four [per cent] in the future, like that’s it,” he told the Top1000funds.com Fiduciary Investors Symposium in Singapore.  

“Fundamentally, what we’re going to experience is this kind of very episodic, spiky inflation because the nature of the shocks over the last 20 years have been very much coming from the demand side.”  

But current shocks in the economy come largely from the supply side such as trade wars and decarbonisation needs. “You’re going to have inflation and growth moving in the opposite directions,” Prakash said. 

This would impact asset allocation in at least two ways, Prakash said. Firstly, real return for clients and members becomes an even more important objective in a high-inflation world, which means funds need to think hard about inflation protection in their strategic asset allocation.  

Secondly, avoiding large drawdowns in a high, spiky inflation environment requires a more nuanced allocation approach.  

“Not all inflation shocks are the same,” Prakash said. “Commodities may not respond the same way to an inflation shock, if it’s alongside a weaker growth environment.” 

“Gold is doing well right now, but it is traditionally a more monetary-led, inflation-type of asset. 

“The inflation linkers – which performed terribly in 2022 in an inflation shock because of the duration exposure – if you actually enter a stagflation world, that’s a really good asset to have. 

“That kind of agility in this world where I think we’re going to be facing a lot more supply shocks has to be part of the investment process.” 

Globally-minded

Aside from investment, Prakash also urged asset owners to re-evaluate aspects of their operating model amidst changing global dynamics. For example, ensuring compliance with local regulations is evermore essential for organisations operating across the globe. 

Other issues for asset owners include paying more attention to sectors intersecting with national interests, as well as reviewing counterparties and being conscious of where their assets are invested.  

Prakash also urged investors to be geopolitically aware. He acknowledged that geopolitical events are hard to foresee but the idea is not to predict the conflicts but to minimise any potential impacts on the portfolio.  

“Ultimately, for long-term [asset] owners, we don’t care about volatility [in the short-term] – what we care about is permanent impairment. And I think the risk of permanent impairment has gone up,” he said. 

“If you’re putting assets in a country, how do you know that you’re going to get your capital back? How do you incorporate that kind of uncertainty into your underwriting process?  

“The reason why investors haven’t paid attention [to these questions] is because we’ve lived in this peace dividend period. So frankly, they were right not to care about it, because it didn’t matter. 

“Today, I think this becomes fundamentally much more important.” 

The past two years have been a challenging time for private equity investors thanks to low deal activity, falling distributions and a tough exit environment. As a result, they have turned to the secondary market as a common liquidity management tool.

But it is far from the only reason why interest in secondaries is on the rise. Niklas Risberg, director at Franklin Templeton’s secondary manager Lexington Partners, highlighted the market as a good way for asset owners to adjust their private equity exposure.

“In the past, if you wanted to manage your private equity portfolio, every year 20 to 30 per cent of your NAV would go down [via distributions], so you could manage how much that exposure is through downsizing your commitments going forward,” he told the Top1000funds.com Fiduciary Investors Symposium in Singapore.

“Now, when you’re not getting that yield on the portfolio, people are definitely thinking about how they can use the secondary market to manage their exposure.

“You might want to get out of certain strategies, or your allocation might be too large… it’s more like strategic portfolio management reasons for selling, rather than back-against-the-wall [with liquidity].”

Australia’s second-largest pension fund Australian Retirement Trust (ART) is a seller in the secondary market, and head of investment strategy Andrew Fisher said that position helps with resource management.

The A$320 billion ($201 billion) ART has a little less than 10 per cent allocated to private equity across the fund. It has been overweight private equity since 2021.

“It’s the same reason why we’re selling data centres the same day we’re buying data centres,” he said.

“It’s actually a resource-efficiency thing from our perspective, [because] cleaning up the portfolio on a regular basis allows the team to focus on the things that matter. And running off funds towards the end of their life isn’t something that we really want to be focusing a lot of time and energy on.”

But Fisher stressed that selling in the secondary market doesn’t mean just spinning off all the unwanted assets in a package. For one, the package needs to at least have some desirable assets that will be appealing to another investor. Secondly, timing is crucial. “If we are going to clean up [the portfolio], we have to clean up before, like eight years into a seven-year fund life – you’ll get nothing for that,” he said.

Risberg added that selling in secondary markets can also help asset owners get their capital back sooner.

“If you have a commitment that has already distributed 1.8 times your money, and you have just a little bit of a tail left, you can probably afford to take a pretty big discount on that remaining NAV,” he said.

“You can take those proceeds that you get from the tail and reinvest them at a better return probably than that last little NAV, which you won’t get any upside on and have to wait for two or three years before it comes back.”

Fee pressure

ART is generally a seller but not an buyer in secondaries, which Fisher said is partially because of Australia’s regulatory environment. A regulatory guide (RG) issued by the Australian Securities and Investments Commission concerning disclosure of fees and costs discourage secondaries for funds like ART, Fisher said.

Fisher said private markets already takes up 80 per cent of ART’s fee budget and, while there is an illiquidity premium in private equity, “it is not consistently enough to justify the fees”.

“You need the occasional 2021-like experience where you get a big payoff to actually justify the fees over the long term, and it’s very hard to predict when that lumpy year comes,” he said. “That’s why we treat private equity as a long term commitment in our portfolios”.

And if ART was to invest in secondaries, “you don’t get to apply the discount to [underlying] NAV that it comes in [to the secondary market] at on the fees, unfortunately,” Fisher said. “You get full-freight fees, plus secondary manager fees on top, and that’s just too much of a burden for us.”

With that said, asset owners should evaluate the merits of secondaries based on their own private equity allocation status, said Singapore-based head of Asia Pacific at investment advisor Albourne Partners, Debra Ng. For the under-allocators or new allocators in alternatives, which locally include many Singaporean university endowments, secondaries could be a great entry point.

“One of the easy ways for new allocators to get into private markets and private equity is secondaries, because you get diversification [of assets], you get a nice vintage year diversification as well, and a quick start while you build the rest of your program,” she said.

More broadly, Ng also highlighted the flow of wealth and retail capital into the private equity asset class, which institutional allocators should be cognisant of.

“For all the things that we ask our GPs and the demands on fees, they’re raising a lot of assets from the retail and private channels,” she said.

“The retail channels are less concerned about the elements underlying the valuations and so on. I think if a private bank can provide access [to the asset class] to their clients, they’re winning.

“If you want better governance and transparency as asset allocators or the typical institutional LPs, make sure that those kind of principles are in place.”

This article was edited on 28 March 2025 to clarify the impact of Australian regulatory guidance on ART’s involvement in the secondaries market.

Institutional investment in private credit across the Asia-Pacific is failing to keep pace with the region’s strong economic growth and more attractive interest rate environment, according to a panel of investors at the Fiduciary Investors Symposium.

Mercer alternatives investment leader, Johnny Adji, said private credit in the region offers a 200-400 basis point compared to US, yet Asia-Pacific only attracts about 5 per cent of flows.

“I think it’s severely discounted the potential and the investment opportunity in this region,” he said at the symposium in Singapore. “If you look at just, for example, on GDP alone – Asia should have accounted for, say, maybe about 25 per cent.”

He said returns in the 9-11 per cent range in the lower middle market senior direct lending sector compared well with historical private equity returns of 15-17 per cent, given PE managers now had to service greater debt costs in a high interest rate environment.

However, it was crucial to choose the right manager given there were fewer to choose from while investors needed to be aware that Asia-Pacific private credit tended to comprise a much higher percentage of a loan – as high as 25 per cent – compared to US private credit.

CPP Investments managing director and head of APAC credit, Raymond Chan, said recent interest rate rises had created more opportunities for credit investors in Asia, given many international funds remain focused on developed markets.

“The opportunity here is huge,” Chan said. “So that’s why I think we are very aggressive in terms of building out the credit book. Basically, it’s more driven by global reactive value as well as the alpha.”

CPP investments had committed close to $5 billion in Asian private credit. It had also taken advantage of recent market dislocation to upgrade the quality of its book from around CCC to a B or BB credit rating.

IFM Investors executive director and co-head of Australian diversified credit, debt investments, Hiran Wanigasekera, said it was beginning to focus on Asia after expanding into every sub-sector in Australia.

“That’s where our next leg of growth in private credit is going to be,” he said.

Returns in its senior secured direct lending strategy had come down slightly to 9-11 per cent on an unlevered basis with credit spreads in the high-four hundred to six hundred basis point range, he said.

Wanigasekera warned that Asia-Pacific private credit is even more illiquid than in other regions.

“We are very firm in saying that private credit is an illiquid asset class,” Wanigasekera said. “There is no traded position. And especially if you’re playing in Asia, the liquidity level drops off the cliff relative to what you can do in US and Europe. So this concept of secondary exit potential in private credit positions really is nonsense factor in this part of the world.”