AI in asset management is much vaunted but there is now growing talk about quantum computing, particularly since a pioneering HSBC forex trade last year. Piyasi Mitra speaks with experts on the future of quantum for asset management.
HSBC pioneered the use of quantum protection for AI-powered foreign exchange trading in 2023 in a groundbreaking trial that saw the bank use ‘quantum key distribution’ to secure a €30 million FX trade into US dollars.
Quantum key distribution – or “QKD” – is a technology that leverages the unique properties of quantum mechanics to create and share cryptographic keys securely. British Telecom, Toshiba and AWS supported the trial, which was designed to protect sensitive trading data from future quantum cyber threats and the initiative aligned with the UK Government’s National Quantum Strategy, which was launched in March 2023 and outlined a plan to position the UK as a global leader in quantum technologies.
Whereas financial services firms would have boasted rocket scientists among their employees, HSBC now has quantum scientists who, along with cyber-crime experts and trading specialists, will use insights from the experiment to integrate QKD into critical trading tools, enhancing security against quantum threats.
HSBC’s CEO Colin Bell said at the time: “The quantum revolution is not on the horizon; it’s already here. Successfully pioneering quantum protection for our foreign exchange trading is a significant step with far-reaching implications for the blueprint of our future cybersecurity.”
HSBC is one of the world’s largest foreign exchange providers, processing 4.5 billion payments last year worth an estimated £3.5 trillion and, more recently, in July this year HSBC also became the first bank to join British Telecom and Toshiba’s quantum secure metro network, collaborating with AWS to install quantum infrastructure spanning 63km via fibre-optic cables from the company’s global headquarters in Canary Wharf, London, to its data centre in Slough, just outside London.
“Well-rounded portfolios”
Experts say that quantum computing has the potential to become a transformative advance in computation, with profound implications for financial institutions including use cases across fraud detection, cyber security and assets and fund management.
Philip Intallura, global head of quantum technologies at HSBC, envisages that the integration of quantum technologies in fund and asset management firms will evolve as robust quantum hardware becomes embedded in investment decision-making processes.
“Once adopted, quantum computing holds the potential to enhance computational capabilities allowing more sophisticated, dynamic management strategies that could lead to higher returns and better risk mitigation. However, its widespread adoption will depend on developing more accessible quantum programming models, better integration with existing IT systems, and a deeper understanding of quantum applications among financial professionals.”
“Once adopted, quantum computing holds the potential to enhance computational capabilities allowing more sophisticated, dynamic management strategies that could lead to higher returns and better risk mitigation.”
Traditionally, optimising a portfolio for both returns and risk management is an intensive task. Germán Soto Sanchez, chief product and strategy officer at Broadridge, says it involves analysing vast amounts of historical data, financial metrics and current market trends to identify the ideal mix of assets.
“Quantum computers, in contrast to classical computers, excel in solving complex optimisation, simulation and machine learning problems and they explore investment possibilities much faster. This, in turn, allows managers to consider factors beyond traditional financial metrics for a more intricate optimisation, providing a holistic view of potential investments and leading to a more well-rounded portfolio.”
Also of critical importance is that quantum computing excels at running complex market scenarios with greater precision than classical simulations, Soto Sanchez says.
“Quantum computing can simulate the domino effect of a climate change event or a geopolitical crisis on specific asset classes and their interconnectedness. By modelling diverse market scenarios, it empowers asset managers to identify and mitigate potential risks effectively. This allows for the development of future-proof portfolios that can not only withstand unforeseen market disruptions but also potentially outperform traditional strategies by capitalising on hidden opportunities.”
“Quantum computing can simulate the domino effect of a climate change event or a geopolitical crisis on specific asset classes and their interconnectedness.”
Traditional analytical tools often struggle with the sheer volume and complexity of financial data. By leveraging quantum computing, managers can unlock hidden patterns and trends within data, providing deeper insights into market sentiment and future behaviour.
Secondly, complex financial models often involve intricate calculations that quantum computers excel at solving exponentially faster compared to traditional methods and can model complex market scenarios with greater accuracy. Soto Sanchez adds: “This translates to real time portfolio adjustments leading to improved returns and capturing fleeting market opportunities.
“Enhanced data analysis and calculation capabilities, coupled with the ability to conduct complex simulations, empower asset managers to make more informed decisions by helping them identify undervalued assets, predict market movements with greater accuracy and help them identify the sweet spot between risk and return when managing portfolios.”
Automated risk management
Beyond decision-making, this technology can automate portfolio management tasks such as rebalancing and risk mitigation, allowing managers to focus on strategy. Additionally, it has the potential to unlock new asset classes and investment strategies. According to a study by McKinsey & Co, quantum computing will generate upwards of $80 billion in value across the asset and wealth management industry by 2035.
“Quantum-inspired algorithms allow for real-time, optimal investment adjustments. They also facilitate advanced risk modelling by evaluating different scenarios, leading to a more comprehensive risk assessment, says Daniele Grassi, chief executive and co-founder of Axyon AI. Furthermore, such computing techniques can manage complex financial instruments and diversify portfolios, making them resilient to market fluctuations.
They can also handle multiple variables simultaneously allowing for more accurate pricing predictions and thorough risk assessments, leading to improved pricing models and trading strategies, says Grassi.
The future of quantum technology in funds and asset management is promising but hinges on advances in hardware and software. Early adoption could offer a competitive edge, though widespread use in financial services is still in its infancy. As Grassi puts it: “Continued development in quantum algorithms, quantum hardware enhancement and error correction solutions are essential to unlock the sector’s full quantum computing capabilities.”
