Is perfect portfolio optimization now within reach?

Main visual : Is perfect portfolio optimization now within reach?

Can you really optimize short-term funds management or large portfolios of highly fluid assets in near real-time?

Today, this would just about be possible in limited circumstances, but once the number of assets starts to grow even modestly, the laws of mathematics take over and the range of possible outcomes quickly spins beyond the reach of even the fastest supercomputers.

However, there is hope on the horizon. A new way of tackling these so-called ‘combinatorial optimization’ problems is smashing through the barriers of conventional computing. CTOs in financial services are intrigued enough to be taking a close look at the emerging new classes of quantum and quantum-inspired computing.

The breakthroughs possible with quantum computing are tantalizing.

In the case of traditional Data Encryption Standard (DES), today’s fastest supercomputer would take around 21 billion years – or one and a half times the age of the universe - to calculate the correct prime factors of a number with 617 decimal digits (in other words, a 2,048-bit key).

However, with a quantum computer, this task could be manageable virtually instantly.

JP Morgan, Barclays, BBVA and Morgan Stanley are among those currently exploring quantum’s potential in areas as diverse as advanced cryptography, fraud detection, asset valuation, and portfolio analysis.

It’s not plain sailing, it needs to be said, as the experimental quantum computing systems that currently exist are limited in scope, temperamental and hugely expensive to own and operate.

However, a new report just published by Fujitsu shows that the sort of breakthroughs promised by quantum computing are now seen to be in reach by a significant proportion of senior executives in the sector, by using a new quantum-inspired business solution – the Fujitsu Digital Annealer.

You might think this is over-ambitious, but Fujitsu is already helping NatWest bank solve some of its most complex, challenging and time-consuming financial investment problems by optimizing its mix of high-quality liquid assets (HQLAs) including bonds, cash, and government securities.

Using Fujitsu’s quantum-inspired Digital Annealer, NatWest Bank has completed a highly complex calculation that needs to be undertaken regularly by the bank, at 300 times the speed of a traditional computer, whilst providing an even higher degree of accuracy.

In this use case, Fujitsu worked with NatWest to help portfolio managers optimize the composition of the bank’s £120bn HQLAs portfolio - assets such as cash and bonds that every UK bank must hold as a buffer in case it runs into financial trouble.

Quantum is coming to financial services

Despite quantum computing being in its infancy today, there is already pent-up demand for its disruptive power, with 84% of financial services business leaders surveyed in the report research believing that its arrival will accelerate the optimization of business, logistical and industrial processes, help deliver digital transformation and ensure they remain competitive in fast-changing markets.

There is already a long list of major companies starting to channel significant investment into exploring quantum computing.

Nearly a quarter (24%) of the sample interviewed for the report state that it is under consideration in their organization, with financial services organizations substantially more likely to be reviewing quantum (31%) than any other sector.

Insight into quantum computing is also strongest in the financial services sector, where 54% of respondents stated that they had either a good or a very good understanding.

It seems that one crucial factor driving this interest is fear of competitors stealing a march. In the financial services space in particular, it is understood that quantum computing could provide rivals with a competitive edge. More than three quarters (78%) of business leaders in the banking and insurance sector believe that they would be disrupted if a competitor adopted quantum computing before they did – notably higher than the 67% average across all sectors.

Indeed, most business leaders believe quantum computing could transform their organization (52%) and more than three-quarters think it would disrupt their sector (79%). Participants in the financial services (61%) see the strongest potential for quantum computing to reshape their own organization.

Optimization – not technology

It would be a mistake to conclude, in my opinion, that people are clamoring for a new computer technology, simply because it is theoretically possible.

What they really want are the business outcomes that could be delivered by quantum performance.  Indeed, if we look at the survey findings, we see that close to three quarters (71%) of business leaders say that optimization services are far more relevant and real to their current requirements than quantum computing.

Those in financial services are the most likely (44%) to think the concept of optimization could be easy to apply to their organizations’ needs.

This shows a clear case for investment in optimization today, with 61% in the sector believing, for example, that increasing the optimization of the way in which they undertake a risk assessment of customers or financial instruments would be a game-changer.

Why are we waiting?

If the demand for process optimization solutions is clear, so is the frustration at the lack of solutions available to date.

Most of the research sample (89%) believes that insufficient computing power from today’s technology is holding back their business from taking full advantage of combinatorial optimization in order to revolutionize business processes. Nor are they confident that true quantum computing is the solution.

Businesses are frustrated with the slow pace at which the technology is developing, with the study revealing that 50% of respondents do not expect quantum computing to go mainstream in the next decade and a further 9% believe that will never happen.

This skepticism would explain why close to two thirds (65%) of all participants want optimization solutions today, rather than experimental quantum technology sometime in the distant future, with the desire to move now strongest among leaders in manufacturing (80%).

Quantum-inspired optimization is here

The need for optimization solutions is clear and the demand for answers today is strong. So, perhaps it is not surprising that seven in ten organizations now recognize Digital Annealer’s potential to accelerate their journey to a quantum-computing future.

Besides the portfolio optimization use case with NatWest Bank, we are also working on various other areas including:

  • Optimization algorithms for cash management optimization in the ATM network
  • Credit risk assessment for banks and insurance companies, for example, to reduce credit risk by improving the credit rating accuracy of individuals or companies
  • Derivatives transactions for interest rate swap optimization
  • Business improvement, where scheduling management involves such complex variables that it is currently impractical to generate optimized plans that respond to real-time changes in circumstances.

All these examples (which are explained in more detail in our white paper) come with high pay-back potential for banks and insurance companies and are achievable today with the Fujitsu Digital Annealer - a bridging technology to quantum, able to solve intractable problems at speed, and therefore capable of bringing transformative benefits to businesses right away.