20. FinTech Awards 2023 Wealth & Finance Jun23326 Mining Idiosyncratic Alpha Revant Nayar was known to have an irreverent and unconventional approach to physics. After publishing a string theory paper with Steve Gubser, he proposed that they work on theories with certain ‘nonrelativistic symmetries’, but this proposal did not align with the research goals of the Princeton Physics Department. Unfazed, Nayar applied these very symmetries to come up with options pricing formulae that went much beyond Black Scholes. It was a way to derive options pricing density functions using group theory without reference to a PDE or SDE, on which standard quant finance relies. This drew on a prominent new development in theoretical physics. Peter Carr, NYU Professor, a friend of Nayar, and an Advisor to the company, had called this approach a ‘paradigm shift’ in options pricing. Nayar gave guest lectures on his techniques at NYU, Columbia, Bloomberg, and other prominent institutions. “I am rebellious, to a fault, and always have been.” Nayar admits. “Academia has been gripped by a wave of incrementalism. In the quant fund industry, one does not stand on the shoulders of giants, but one must slay them to survive.” Till today, FMI researchers carry an infectious streak of rebelliousness that is highly encouraged. The team comprises physicists, mathematicians and engineers from Princeton, Moscow, and India. Allocators have complained about the lack of unique and uncorrelated alpha in quant funds, even as quant funds have been sluggish in 2023 after the highs of 2022. There are three reasons quant funds fail- overfitting, alpha decay and regime shift risk. FMI techniques are robust to overfitting and non-stationarity and are protected from alpha decay by 300 pages of unpublished research. “I have interviewed over 200 quant funds, and I have never seen such a novel approach as the one used at FMI,” comments a prominent family office CIO and quant allocator. Not much is known about the precise algorithms used at FMI. However, FMI does publicize some of their research on econophysics and quantum-inspired approaches to finance on platforms such as Bloomberg Quant Seminar and Global AI Conference, related media on which can be accessed online. At FMI there is a commitment towards radical honesty and radical transparency within the firm. In 2021, Nayar launched the Econophysics Research Collaboration (FTERC) that involved researchers, students and Professors from leading universities and research institutions. This is a good way for academics, especially PhD students, to test and apply their skills to one of the hardest problems known to man- financial prediction. At the same time, it enables the quants at FMI to stay up to date with the latest developments in the physics and math literature. At the same time, the FMI team does comprise luminaries from Citadel, Rotella and Blackrock, adding some industry experience to the mix. “Working at FMI is intellectually engaging… we are always trying to identify and cover in an exhaustive and innovative way, all possible sources of alpha and their associated pitfalls. At the same time we keep things straightforward in other areas.”, says the Head of Quant Mihail Amarie, another Princeton physicist with a background at pioneering quant hedge fund Rotella. “We do have a novel approach to hedging but apart from that we follow a lot of established best practices when it comes to risk management, position sizing, managing transaction costs etc.” After generating returns of above 25 percent a year at Sharpes of 3 for two years, FMI shifted their focus to the US equity markets. It began running SMAs in the US equity markets around May 2023 trading US equities, ETFs and ADRs. “We are looking to expand trading to other asset classes such as forex, futures and global equities”, says Nayar. “We are trying to strengthen ties with prime brokers to be able to trade higher volumes and diversify our bets, in addition to gaining access to new markets to trade.” In an increasingly regulated industry that has seen a decline in innovative small funds, FMI Tech offers a refreshing approach. “Our edge is not buying expensive data or infrastructure or feature engineering, It is pure mathematical innovation. And we intend to keep it that way.”, asserts Nayar. Contact Details Contact: Revant Nayar Company: FMI Technologies Web Address: https://fmitech.net/ FMI Technologies LLC is among the first quantum-inspired quant hedge funds. FMI Tech started as a think tank conducting research at the intersection of physics, complexity theory, and mathematical finance involving researchers and students at the Princeton Physics Department. It later developed physics and quantum-inspired alternatives to AI that were especially suited to tease out tiny signals in large amounts of noise. After providing investment advisory services, it then transitioned to asset management first in the Indian and then in the US equity markets.
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