Investment

Quantum computing will transform investing – family offices/UHNWs are investing

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Xanadu, a Canadian quantum computing firm backed by a posse of powerful investors, expects to take two years, or less, to develop systems which can be used by banks and asset managers to transform their businesses.

Chief executive Christian Weedbank made the forecast at a conference last week, where he said quantum computing could dramatically improve the development of derivatives theory and portfolio optimisation.  Advances and improvements will follow elsewhere, in stages.

The initiative is part of a technological arms race dramatically changing the investment landscape, with the help of machine learning and big data. The winners will hope to generate higher returns, at faster speeds, in the same way advanced computers made hedge fund firms like Renaissance Technologies world beaters in the 1980s. 

According to one equity manager: “Excel spreadsheets gave early movers an advantage, before computers did. Quantum computing will become important, in just the same way.” Family offices, already alert to the risk of cyber-crime, will need to keep a close eye on the way the market is set to evolve.

Xanadu has set out its stall as a specialist quantum finance business. Started in 2016 it has just pulled off a $32 million fundraising led by Omers Ventures, part of the Ontario pension system. 

The deal was backed by cryptocurrency investor Tim Draper, said to be worth $1 billion, whose family owned 10% of Skype prior to its purchase by eBay. Draper was an early investor in Baidu, Hotmail, Tesla and Twitter.

Another backer, Radical Ventures, is led by AI pioneers Jordan Jacobs, Tomi Poutanen, Benji Soucher and Maks Volkovs. Their former AI company, Layer 6, was bought 15 months after launch by TDBank which wanted to make use of its predictive software. After using state backing to start the Vector Institute for Artificial Intelligence, Jacobs and Poutanen are at the heart of Canada’s influential AI movement. 

Radical’s backers include family investment group Wittington Investments, 79% controlled by the Garfield Western Foundation of AB Foods fame. Georgian Partners, Silicon Valley Bank and Real Ventures were also involved in the Xanadu fundraising, spiced up by the presence of Seth Lloyds of MIT, a renowned advocate of quantum computing, who believes they are embedded in the workings of the universe.

Quantum computing seeks to use the behaviour of matter and energy at atomic and subatomic levels to carry out calculations at extraordinary speed. It takes advantage of “superposition” where (unlikely as it seems) sub-atomic participles exist in multiple states at once. 

According to Weedbank: “It’s like a light switch turned on and off at the same time.  Or a cat that’s dead or alive.” Which means you can carry out more than one calculation at the same time.

Quantum information can be transmitted at great speed by using so-called “entanglement”, using sub-atomic particles which move in unison, even if they are separated by large distances.

Xanadu uses light photons for its calculations, using photonic chips at room temperature. It has worked with BMO Financial Group and Scotiabank Partners of Canada on quantum computing to speed up systems which underpin derivatives trading.  It works with Xanadu’s machine learning products to develop effective pricing models at speed. 

Financial institutions currently devote enormous resources and time to pricing up portfolios of trading products under different market scenarios, using so-called Monte Carlo simulations. The Monte Carlo algorithm developed by Xanadu has dramatically speeded up the pace of simulation, and make it possible for client deals to be implemented far more quickly. 

Stella Yeung, chief investment officer at Scotiabank banking and markets said the results were impressive: “Leveraging quantum computing to accelerate data collection and insights will enable speed to market and benefit our customers.” BMO Financial chief architect Lawrence Wan said their collaboration had been: “informative.” 

According to Weedbank, Monte Carlo simulations which are currently carried out overnight can be completed in minutes. Portfolio optimisation, used by asset managers, should also be completed much faster. 

Weedbank said Xanadu would need to work closely with customers to develop systems, but said success would bring a financial institution: “huge competitive advantage.” He said the shift will be sudden: “One day it will not be there. The next day, it will. But not just yet: he says it will take between 1.5 and 2 years for change to be implemented. From that point: “You could improve your financial returns without increasing your risk.

He said Xanadu will be adopting an incremental approach to improving quantum processing, like Intel, which continually produces improvements in its microchips.  He admitted to concerns that quantum computing could breach existing cyber-security protocols: “But computers that can do that are ten years off development. We will develop quantum-safe security within two.”

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