This document discusses using network science and graph analytics to manage risks and assets in an increasingly disrupted financial landscape. It outlines how FNA maps can 1) provide a big picture view of connected risks, 2) help sense and respond to emerging themes, and 3) amplify human intelligence across the asset management ecosystem. The maps identify systemic pressure points and amplify risk management, wealth management and private client decision making by developing a shared visual intuition around global investment patterns and risks.

1. RISK & ASSET MANAGEMENT IN THE AGE OF DISRUPTION
April 19, 2016
Financial Network Analytics
Alan Laubsch
Chief Community Builder
alan@fna.fi

2. 2
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Asset Management Challenges

3. 3
Market linkages
Asset price data
Clustering
Balance sheet data
Network Maps reveal connected risks and
hidden opportunities
Bilateral exposure data
Central nodes

4. 4
How to manage systemic risk?
As in healthcare, our best chance lies is early detection
Source: MULTIPLE SCLEROSIS: ORIGIN OF ABNORMAL CELLS FOUND, UC
DAVIS (2011)

5. 5
Diffusion of Disruptive Innovation
Source: Wikipedia; see Geoffrey Moore’s “Crossing the Chasm” (1999)
1.Macro: Scenarios from Innovators
2. Micro: Market signals from Early Adopters

6. U.S. Subprime Bond Early Warning Case Study
1. Robert Shiller warns of housing Bubble in 2005 (Macro)
99% VaR bands vs 2006-1 AAA spread changes
Source: Alan Laubsch “Subprime Risk Management Lessons”, RiskMetrics

7. Three stages of risk

8. 8
US Housing Bubble: A Network View
View Interactive Animation

9. European Sovereign Bond Crisis Early Warning
View Interactive Map

10. Greece EU Decoupling from Oct
2008
Most correlated: Portugal, Ireland, Spain, Italy

11. 1
Implication of Complexity
From “Predict & Control” to “Sense and Respond”
with Dynamic Steering

12. 12
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Asset Management Challenges

13. 13
Dragon King
(Sornette 2009)
Black Swan
(Taleb 2001, 2007)
Two kinds of crises
What are you afraid of?
The future is already here. It’s just not very evenly distributed.
- William Gibson

14. 14
What precipitated Energy’s 24 June 2014 tipping
point?
View Video

15. 15
Disruptive Energy “Dragon Kings”
The future is already here. It’s just not very evenly
distributed. - William Gibson
Alternatives
Divestment
Carbon Price

16. 16
Accelerating Rates of Adoption

17. 17
Rise of the machines…

18. 18
… and robo-advisors

19. The new generation of wealth owners:
● Born Digital: networked
● Visual, intuitive, fast to learn Apps for every
problem

20. 20
Agenda
1. Adaptive Risk Management
2. Identifying Phase Transitions
3. Asset Management Challenges

21. 21
Asset Management Challenges
I. Big picture view of connected risks
II. Sense & respond to emerging themes
III. Amplify human intelligence

22. 22
I. Big picture network view: hidden patterns
Nov 28 2014 OPEC Black Friday “Surprise”

23. 23
Systemic implications?
Amplifiers?
Highlight fragile assets, key pressure points

24. 24
FNA Correlations China Case Study:
Traffic Light Signals: Bull Topping Bear
17 April negative outlier with subsequent clustering & imbalance
pointed to phase transition
1. Exponential
rise
2. Topping
process
3. Negative
spiral
Contagion
FNA Correlations Signals: Exit long China 17 April. Short China 6 June.

25. 25
Signal: Reduce Global Equity Positions 29 June
Systematic risk
jumps
Increased
coupling
Broad outlier spike
(1yr+ max)
Clustered big outliers at
network core
(2.8σ+ for S&P 500 and other
broad indices)
Flight to safety
assets
FNA Correlation Map reveals global contagion

26. 26
29 June Marked Global Contagion
Systematic risk spikes from 100 day low as Length of Tree shrinks

27. 27
8 July Crescendo Confirms Contagion
Signal: Continue reduction of equities, move Aggressive Portfolio
clients to Conservative
Signal: Underweight Global Equities

28. 28
II. Sense & respond to emerging risk
• Proactive risk management is critical given tipping point dynamics
Source: “Building A Reputation Risk Management Capability”, Diermeier & Loeb, 2011
Invisible/Potential
Visible & amplifying

29. 29
Build robust portfolios using relevant
stress tests
Reverse Stress Testing Balanced Portfolios reveals increased risk
due to IR + Equity coupling

30. 30
III. Amplify intelligence with dynamic maps
Rapid environmental awareness is critical for navigating challenging
terrain
“MIT scientists develop Prometheus like environment scanner”
Source: computerstories.net

31. FNA maps amplify human intelligence in the asset
management ecosystem
● Asset managers can effectively sense and respond to emerging risks
and opportunities .
● Risk managers can detect portfolio concentrations and easily generate
relevant stress scenarios (including Reverse Stress Tests).
● Wealth Management Advisors can use FNA maps to discuss driving
themes in the macro investment landscape with clients.
● Private clients can visually monitor and explore the evolving
investment landscape with institutional quality analytics at their
fingertips. Importantly, FNA’s interactive visual analytics bridge the
gap with the emerging “born digital” generation who are transforming
the wealth landscape globally.

32. 32
SUMMARY & CONCLUSIONS

33. The Power of Connected Data
Network Science is transforming industries
Fast growing companies base their businesses on connected
data
Network Science helps to detect patterns in complex data
Google’s graph based algorithm,
PageRank, replaced Altavista’s
disconnected page indexing
LinkedIn’s networking based model
is replacing Monster’s static unlinked
CV’s

34. FNA: A Financial GPS System to nagivate
global markets
Network Algorithms identify systemic pressure points
Graph Analytics use human visual intelligence for pattern recognition

35. 35
Maps amplify human intelligence in the
entire asset management ecosystem
I
Asset Manager Risk Manager
Wealth
Manager
Private Client
Identify and
discuss
systemic
patterns
Develop
visual
intuition
Build
Community

36. FNA
Alan Laubsch
alan@fna.fi
Thank You
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