Thursday, August 31, 2017


Book review
The Wealth Wallahs
Shreyasi Singh
Bloomsbury Publishing India Pvt. Ltd

Sudhir Raikar, Content Architect, IIFL | Mumbai | October 13, 2016, 14:28 IST


The Wealth Wallahs is more than a delightful peek into the world of wealth. Author Shreyasi Singh’s measured insights can’t merely be attributed to her editorial stint with the Indian edition of the US magazine Inc which gave her a ring side view of India’s new-age entrepreneurial evolution. Her conviction stems more from a visible penchant for detached probe, consciously avoiding the lure of convenient conclusion which, especially in the case of literature of the given genre, tends to escape public scrutiny.

Against the enchanting backdrop of a bagful of ‘tryst with wealth’ tales - whether incidental or accidental - of some of the happening first-generation entrepreneurs and professionals - she presents a near-360 degree account of IIFL Wealth, the trailblazing firm which has transformed the wealth management space with its prudent takes and proactive tweaks.

Singh’s ‘unspooling’ of the IIFL Wealth phenomenon is splendidly universal, an objective commentary on the post-2008 progression led by India’s entrepreneurial zing, also a torchlight on the cosseted territory of wealth that was steeped in secrecy for long. In what’s a profound scrutiny of the first-generation wealth dynamic, citing seminal work of specialists and surveyors for germane reinforcement, Singh underlines the changing psyche of the oven-fresh wealth creators and the consequent shift in the strategies of avant-garde wealth managers, as also the cause and effect of the socio-cultural attitudes of a vast majority, watching the wealthy from the sidelines.

It was IIFL Wealth’s astute focus on first-generation money, Singh tells us, that helped it reap rich dividends contrary to what the majority believed when they set up shop. On one end was the aftermath of the global slowdown that posed serious questions on the value prop of a novice wealth management player, on the other was a thriving environment where umpteen funding rounds were making millionaires zillion times faster than ever before and, where for the first time, working professionals became well-heeled purely from employment. By virtue of its offbeat focal point as much as its core competence made sharper from the synergies with its parent group, IIFL Wealth mirrored the success of its clients and scripted a revolution of sorts for the whole industry.

Singh has unleashed a wealth of aspects linked with wealth:

Like how many of India’s first-generation rich are yet uncomfortable talking about their affluence, perhaps guided by fear of inviting undue attention in a heavily lopsided society, and even fatal consequences as many events have proved...

Like how the manner in which wealth is made, particularly in specific sectors like real estate, still influences public perception – differing vastly across geographies and demographics - that in turn affects the behaviour of those in its possession...

Like how the venture capital and private equity-backed wealth phenomenon has changed the face of entrepreneurship in India, making it more democratic and ‘beyond the clutch of a small group of business families and industrial houses’...

Like how most of the first generation rich swear by refreshingly new definitions of wealth rooted in purpose and prudence ( and even philanthropy), not power and propensities...

Singh neatly sums up how the first generation rich have changed the rules of the game for wealth management (thriving on calculated risks and a yearning for capital growth, not merely its protection) before unfolding the inspiring story of IIFL Wealth. Her chronicle of the maverick wealth management firm is matter of fact, a welcome departure from the typical media narratives that are either reduced to replicas of corporate brochures, too rosy for comfort, or made to sound unduly caustic only to project ‘deep insights’ through a premeditated stance of dismissal and negation.

Singh dissects the IIFL Wealth DNA beginning with the fascinating bios of the three founding musketeers and a brief on the owner of the holding company, himself a self-made entrepreneur who built a financial powerhouse on the sheer strength of his non-conformism. The firm’s vision and mission, values and beliefs, style and substance, camaraderie and conviction, strategies and tactics, trials and triumphs, twists and turns, learning and improvisation – she touches every aspect by reciting endearing anecdotes that tell us more about the stellar character of the firm and recounting milestone developments that scripted its success and competitive edge.

Above all, Shreyasi Singh is an awesome story teller, judiciously linking the end of each chapter to the beginning of the next with the authority of a bestselling author. That’s precisely why this is not just a book for the wealthy or the managers of their wealth. As Singh puts it succinctly, it is useful reading for anyone interested in a fast-evolving, aspirational country, more so when wealth decisions are influenced as much by personal circumstances as by workplace realities.

Monday, August 28, 2017

The Best Option: Trust the Greeks

Courtesy: An IIFL appetizer on Option Greeks and their pivotal significance in Options trading.
Sudhir Raikar, Content architect, IIFL

Ancient Greek philosophy, much like the Indian Vedic thought, is unanimously hailed as the mother of deep introspection and radical reasoning. In fact, the European renaissance owes a lot to the Hellenic republic for the knowledge repository in diverse areas including polity, philosophy, ethics, metaphysics, ontology, logic, biology, rhetoric, and aesthetics. No wonder, the Americans still turn to Aristotle’s Poetics to fathom the root cause of any tragedy. The tragic flaw, Aristotle reminds us, is hubris, an excessive pride that causes the hero to ignore a divine warning or to break a moral law.

In the context of financial tragedies, hubris could well be the collective complacency and conceit that breed inertia and indecision. Going deeper into the womb of the financial context, a conveniently complacent perception that guides most players in Options trading is that the macro variable of market direction rules the game, with little or no thought to the velocity and volatility of change as also the associated time bleed.

Trust the Greeks for providing a reliable compass to find our way through the often-turbulent, living waters of premium movements – in the form of a lighthouse popularly known as ‘The Option Greeks’. A better appreciation of the Option Greeks will help novice traders lock horns with the intricacies of Options pricing, which go far beyond mere price movements of the underlying stocks or indices and merit a deeper probe into the distinction between option price and option value.

The Option Greeks find their roots in mathematical models like Black-Scholes and Cox-Ross-Rubinstein. They quarantine a given variable to study the effect of its change on the options price. Consequently, we get a concrete rationale, albeit theoretical, to base our trading decisions which otherwise could prove to be a nightmarish experience if driven by blind faith, half-baked advice or reckless choices. If you develop some resonance for the Option Greeks, you would never say, “It’s all Greek to me”. To help you do just that, here’re five Greeks introducing themselves for the very first time in the history of Options Trading:

Delta: Prices change, so do premia

Hi folks, I am well known to students of physics and mathematics. In the context of options trading, I am a dynamic number revealing the change in premium following the change in the price of the underlying security. For call options, I move between 0 and 1. So if I am 0.3, the premium will vary by 0.3 points for every 1 point of change in the underlying price. For Put options, I range between -1 and 0 (diametrically opposite you see). So, for every gain of underlying price, put premium goes down to my extent (exact opposite for any fall in underlying price). By using an options calculator, you can match my values with the given moneyness applied to calls and puts as per the respective logic in contrary directions (ITM: positive intrinsic value and time value, ATM: strike price equal to current price or OTM: no intrinsic value)

Gamma: Who moved my delta

Hello, I am expressed as a positive number for both calls and puts, calculated in terms of my 2nd order derivative Vomma. I let you know the rate at change in the option’s delta in line with the change in the underlying. So, delta moves to the extent of my value for every point move of the underlying. A revised delta is thus original delta + (point change in underlying multiplied by me) I may appear hopelessly vague to you but do pay close attention nevertheless. It’s only when you consult me for risk analysis, you find that equal deltas may not bear identical outcomes. A delta with a higher value of mine will spell higher risk or reward, given the fact that any antagonistic change in the underlying stock or index will have a large adverse effect on the delta (ditto for favourable outcomes).

Vega: Left, right, centre of Ups and Downs

I measure the rate of change of option’s premium for every percent change in volatility which is in turn represented by fear and uncertainty over likely and unlikely market developments. All options, whether calls or puts, rise in value with the rise in volatility thereby increasing the likelihood of the option expiring ITM. No marks for guessing that I am a positive number, for both calls and puts. All other things being constant, I will always be higher for ATM options compared to the other two variants given that ATM options are most sensitive to volatility in terms of aggregate points. Need I add that OTM options are the most sensitive to volatility in percent terms.

Theta: All about time and its decay

I measure the rate at which an option loses value with the passage of time. As options get closer to expiration, the rate of money loss increases, so does the premium. The eroding premium represents the time decay. Simply put, I represent loss of points in the given time frame. I have different mood swings for different strike prices. For deep OTM and ITM options, I deplete at a furious pace in the initial stages and get reduced to almost nil during the concluding phase. But for ATM options, I do the contrary, constant during the initial periods and super-fast in decay during the last phase, with the pace of deterioration maximum in the last leg. I am the hot favourite of option sellers for obvious reasons. By the way, time expiry is more crucial than what you think. So even if my friend Vega shows high volatility, he may have a limited impact on the option value if the time to expiry is less. So, read mine and Vega’s values in concurrence given that time and volatility are interrelated variables.

Rho: Strictly a matter of interest

I begin (and end) with a humble submission! Yes, I don’t matter much to you given the relatively steady state of bank interest rates. Yet, no harm in knowing me better. I stand for the change in option value for every percent-point change in interest rates. My formula is rather complex, but it should suffice to say that I am calculated as the first derivative of the option's value with respect to the risk-free rate. Interest rates are used in pricing models to consider the options price based on its hedged value. I am positive for calls bought, as higher interest rates push call premiums up. Conversely, I am negative for puts bought as higher interest rates erode put premiums.

Sunday, August 27, 2017

The Riveting Rhythm of an Algorithm

Sudhir Raikar, IIFL | Mumbai |

Algo Trading represents a captivating convergence between Finance, Math and Technology. Before we explore its inherent potential, we need to explode a few myths. Here’s a primer for beginners.

The role of algorithms in addressing the needs and requirements of scores of disciplines across all walks of life – from commuting to computing – cannot be overemphasised. The answer to any challenge, common sense has it, is essentially a list of logically sequenced rules which is what an algorithm is all about. Named after Persian Mathematician Al-Khwarizmi’s set of arithmetic rules for Arabic numerals, algorithms evolved as potent tools for automated analysis, thanks initially to Charles Babbage’s pioneering Differential Engine and later Alan Turing’s dynamic Universal machine.

Today, the internet has truly unleashed the algorithmic potential in ways that were hard to imagine only a few years ago. Search engines, social networking platforms, e-commerce portals, hardware, software and middleware vendors - just about every entity relies heavily on the power of algorithms to identify preferences, define trends, influence target communities and build competitive edge in an ever-evolving marketplace. Data mining and analytics have taken a big leap forward with the recent marriage between algorithms and artificial intelligence.

Talking of the bourses, algorithmic trading is a sterling example highlighting technology’s enabling role of enhancing financial decision making in a highly unpredictable environment. Algo trading is an emotion-free, bias-free, scrupulous and validated mathematical analysis of humungous volumes of market data. Apart from expediting the analysis and execution processes, it helps market players make better decisions across diverse spheres including market making, inter-market spreads, arbitrage, hedging or speculation – whether bullish, bearish or range-bound.

Algorithms analyze market data based on pre-defined parameters and mathematical models which could be diverse in nature – from purely fundamental to the pattern-based. The models are the same, but the algorithmic value-add comes from the precision, flexibility and speed of analysis. Contrary to popular perception, algorithmic logic is fairly simple to understand even if they are intricate to develop and design. Simply put, algorithms study the stock market by weeding out emotional, subjective and irrelevant factors from the analysis. For Algo trading, it’s elementary to define the set of rules for trade entries and exits as also to gainfully employ historical data to build trading strategies.

Now that we have some idea of the essence of Algo trading, let’s explode the popular myths surrounding the term. Based on the clarity of thought, it would become much easier to explore the Algo market space for identifying and engaging with credible vendors and value providers.

Myth 1: Algo trading is fool-proof

Risk is integral to Algo trading like it is to any form of market activity. When it comes to unpredictability, they become as infallible as the weather prediction at times if not more often. The market can beat the models in several unfathomable ways and it’s necessary to take a holistic view of the overall portfolio. You may win some claims, you may lose some stakes but if you end up being a net winner, you have reaped the rewards of Algo trading, much like the common investor who spreads his or her portfolio across sectors and businesses to profit from diversification. And like how one needs to evaluate one’s portfolio potency from time to time, even the mathematical models governing Algo trading need to be regularly assessed for their dynamism and suitability in line with the targets and sectoral specifics of every investment. Another issue of concern and consideration is the caustic Algo warfare wherein certain crafty algorithms regularly look to outsmart the others to make a killing based on the illusions they create. There have been instances of algorithmic manipulations in the market that essentially profit from misleading other algorithm-driven traders as well as common investors. For instance, some Algos create artificial buying pressure on certain counters to influence other players to make aggressive purchases in anticipation of attractive price highs. Once the intended triggers have borne fruit, the mayhem architect quietly exits the scene having reaped a fortune.

Myth 2: Algo trading is only for the big fish

This is more the result of a fear psychosis emanating from ignorance. Essentially an enabler, this tool is pretty democratic in its utility value and proves gainful provided one is prudent about risk management and constant evaluation. Expert help is available to the retail investor to reap the rewards of Algo trading like it is accessible to treasury houses, family empires and HNIs. Like it’s very common today for common investors to engage in technical analysis based on candlestick patterns and moving averages, they can do well to gain some familiarity about Algo trading as well. As it is, this space is gradually opening up its vistas to the retail investor. There are many companies, predominantly in the West, that now offer an unambiguous design environments and programming templates to common traders for developing customised Algo trading strategies. Many vendors are trying to optimize the coding and back testing time to make Algo trading more attractive for everyday investors who wish to get a flavour of the game without any help from computer whiz kids or mathematical geniuses. In the time to come, we may have more and more user-friendly platforms allowing common investors to input asset types, indicators and algorithms in order to track meaningful patterns and predict movements for specified time frames.

Algo trading is naturally suited to asset classes with limited number of participants with the time, inclination and wherewithal to develop quant-based strategies for high-volume trades in an extremely volatile scenario. There’s no surprise that retail investors are invariably not part of this segment dominated by hedge funds and arbitrage houses. However, this fact does not imply the absence of a level playing field as many like to believe. Even without quant-based trading, small traders could never match the might of the top-notch brokers and institutional investors. More importantly, a small investor looking to make steady long-term gains has no reason to compete with the big guns. He/she can still make gainful long term gains from fundamental analysis as also take benefit of the Algo space to sharpen his/her analytical abilities. No wonder, Algo strategies hitherto applicable to high-frequency trades of a few seconds are increasingly being extended to conventional trading of a larger time span – whether days, weeks or months.

Myth 3: Algo trading technology is copybook

Technology for Algo trading, hard as one may like to believe, is far from standard. Right from the choice of language to system architecture, much depends on the trading specifics including trading frequency and volumes.

Readers will find the following thought piece highly informative in understanding the technology considerations of setting up a Algo trading environment including performance, ease of development, resiliency and testing, separation of concerns, familiarity, maintenance, source code availability, licensing costs and maturity of libraries:

Myth 4: Algo trading is disruptive

This is more an expectation than a myth but still far from reality. Algo trading for all its promise is a great complement to conventional trading. In every trade, the human gut feel is of the greatest essence while the quantitative analysis is a great validation tool to remove ambiguity and bias. With the passage of time, Algo trading will only gain from strength to strength for its value proposition is indisputable in making trading decisions fast, reliable and cost-effective. As our trading and investing psyches evolve, we will be keener to take advantage of analytics to sharpen our financial decision-making. But that certainly won’t make Algo trading disruptive as the place and premium of human intuition and insight is irreplaceable especially in situations which are beyond machine comprehension including political instability and natural calamities. As for the future, it clearly belongs to those who show the maturity and alacrity to become masters of both worlds. This tribe will always be in minority but will rule over the majority.

Tuesday, August 22, 2017

What and Why of Mutual Funds

For those who wonder what Mutual Funds are, after watching the "Sahi hai" TV ads

Learn the What and Why of Mutual Funds
Free of jargon or arithmetic
Welcome to the Investment Farm

With this harvest,
You will find it easier to
move on to the
The How of Mutual Funds
So let’s begin…

Imagine a large plantation company
Bumper Harvest Ltd.
Let’s call it BUMPER.

And compare it with a Mutual Fund
Super Mutual Fund
Let’s call it SUPER.

Now BUMPER has an interesting business model
It allows people to become farmers
Without having to work on the fields
As they may not have the time or
Knowledge to take on professional farming
Cool, ain’t it?

SUPER also has an
Awesome business model
It pools in money
From different people who wish to
Invest in the stock market
But may not have adequate time,
Funds or knowledge
To venture out on their own
Is it any less Cool? Surely not!

BUMPER sells plots to its investors
And does farming on their behalf
For a fee of course

SUPER sells units to its investors
And does investing on their behalf
Again, for a fee

BUMPER has a farm manager
Employing best-of-breed farming techniques
Taking care of end-to-end farming,
Highs and lows of weather,
Nitty gritty of the soil

SUPER has a fund manager
Handling the end-to-end intricacies of investment
Studying the highs and lows of economy,
Intricacies of the market
Based on thorough research &
Established principles and practices of investing

The BUMPER team takes care of everything –
From Land procurement, Ploughing, Weeding
To Seeding, Watering, Pest Control
Fertilizing and Harvesting

The SUPER team handles everything –
Fundamental and technical analysis
Studying published data on stocks,
Interaction with company managements,
And corporate site visits.

Both BUMPER and SUPER help investors
Save on costs big time

In BUMPER’s case,
Expenditure on Farm equipment, fertilizers,
Irrigation systems and like
Is shared between investors
Individually, this cost burden would have proved astronomical

In SUPER’s case,
The mega corpus built by
Pooling money from several investors,
Ensures that crucial cost components like
Research, office infrastructure and overheads are
Shared between investors
And thanks to large fund transactions
Happening on a day-to-day basis,
SUPER avails of mandatory services
Like banking and broking at very subsidized rates.

BUMPER offers investors a wide choice of
Various plantation schemes
Depending on the
Kind of farm yield one is looking for

SUPER offers investors a wide choice of
Various investment schemes
Depending on the
Kind of market returns one is looking for

In both cases, the investor has to decide:
How much risk is He/she willing to bear?
How long does he/she wish to let the
Money stay invested?

So, if the investor is looking for a
Regular and steady income with
Limited growth in his capital invested,

BUMPER gives you options of short term crops
Like Paddy, Green Veggies, Cereals and Millets

While SUPER offers fixed income schemes for
Investment in Debt securities like government bonds,
Corporate bonds, debentures and commercial paper.

If investors are looking for healthy capital growth
Over medium to long term
And don’t mind short-term ups and downs

BUMPER offers many options like
Like Sugarcane, Banana, Bamboo
For the medium term
And Papaya, Mango, Coconut or Teak
For the long term

While SUPER offers medium to
Long term growth plans
In equity shares of companies
From different sectors like
Manufacturing, Service & Technology

If one wishes to make the best of both worlds,
There are balanced schemes that provide
Both growth and income in different proportions

For this, BUMPER provides hybrid farming options
Short-term and long term crops
Even fodder crops for animal feed
All grown on the same plot

Mutual Funds also offer balanced schemes
With different permutations and combinations
Of debt and equity instruments in one scheme

What’s more!
Both BUMPER and SUPER offer
Special schemes too

If BUMPER has Horticultural plantations and
Innovative investment options like
Poultry and dairy farms

SUPER offers diverse alternative options
Like Gold Funds, Fund of Funds and International Funds

But the best results invariably happen when investors
Strike a blend between short term and long term

Having invested in different crops
However small the plots may be
BUMPER investors can make steady gains as
On the whole, the yield is maximized
To the extent possible
In the given soil and weather conditions
Similarly, For SUPER investors,
The investment amount,
However small it may be,
When invested in a range of securities
Across different sectors

Ensures that one is not exposed
To the risks of a single sector
While profiting from the gains
Of as many possible
In the given economic and market conditions

Both BUMPER and SUPER help you
Build a smart portfolio
Of investments in different avenues
If you had heard of diversification
Only as a Buzz word before – now you know what it means!

So, let’s recap the similarities
Between BUMPER and SUPER

For BUMPER investors, the objective is to
Maximize farm produce and minimize risk
Based on BUMPER’s
Expertise in best-of-breed farming

For SUPER investors, the objective is to
Maximize returns and minimize risk
Through investments
In different avenues
Backed by SUPER’s
Expertise in investments

And now, let’s talk about two facts
Exclusive to SUPER

ONE: Your SUPER investment
Is subject to market risk but is
100 per cent transparent and safe
Because it is
Governed by the
Securities & Exchange Board of India,
Legally bound to follow
Stipulated Rules and
Disclose financial statements and
Fund performance details

And TWO:

Stocks represent the extent of equity ownership in a company
Units represent the extent of ownership in a Mutual Fund like SUPER

When SUPER invests in a stock, a SUPER INVESTOR
Doesn’t own that stock,
He/she own units of SUPER which has
Invested in that stock.

The Long and Short of it

The fruits of a long term strategy in the context of equity investments are obvious – for all to see - and yet why do scores of investors stay oblivious? The reason can be traced to a paralytic and pervasive fear of entering the markets. And the psyche is the same regardless of the state of the bourses or the status of the investor.

When a bull phase is on, investors shudder at the very thought of an imminent correction. Conversely in a bear phase, they feel that the correction will be devoid of resurrection, and would only worsen by the day. Both thoughts unfortunately trigger the inaction inertia effect. Worse, they impair the faculty for counterfactual thinking that otherwise lends scope for corrective action.

Investors should contemplate market entry in the context of their long term life goals as expressed in financial terms as also the opportunity cost of shying away from the markets. Markets have a marked tendency to be notoriously volatile in the short term and there’s no predictable relationship between returns of previous or successive time frames. Only the long term lends meaning and substance to your investment valuations.

So one can’t really base one's investing judgment based on a quarter’s or year’s market momentum or the lack of it. What one can do is to manage the manageable – which is to forget about timing the market and accept short-term unpredictability as an integral part of the long-term value prop. Postponing one’s investment decision into the deep black hole of the future, merely on the pretext of an uncertain future, is an open invitation to a bleak future.

Saturday, August 19, 2017

On Dementia

There’s not an ounce of doubt about the crucial role of technology in providing a wide range of utilitarian health care solutions. In the context of dementia, more specifically Alzheimer’s, we now have a plethora of fit-for-purpose solutions to help our elderly cope with the emergent challenges of this largely progressive disorder - from assistive calendars, touch lamps, voice prompts to medication aids, remote monitoring systems and tracking devices to brain boosting apps and wireless brain implants. But this copious supply-side push, knowingly and unknowingly, has kept the process above the purpose.

Ahead of ground-breaking research, we need a common sense approach focused on care – more palliative than curative – to help patients restore their dignity, not just function. As much for a happy today as for a better tomorrow. This tight rope walk can’t be traversed at the cognitive level.

Life is inherently meaningless. The onus is on us to find and attach meaning to it. Since the medical curriculum is not designed to address the patient’s psychological needs, practitioners tend to suppress emotion in the focal attention to the scientific treatment. This is a cardinal error. When the patient weeps inconsolably, the whole emphasis should be to trace the root cause, not merely to administer a perfunctory dose guaranteeing a provisional calm.

We need to create purposeful awareness among relatives and care givers of dementia patients, to help them:

1. Raise the right questions rather than seek tailor-made answers,

2. Explode myriad myths and misconceptions surrounding the disease and last but not the least,

3. Break the shackles of cerebral communication to strike a chord with the patient.

This selfless effort is certainly not the proverbial magic pill, but it’s undoubtedly critical to put the rigmarole of medication in perspective.