Morning Coffee: Junior Deutsche bankers will be given imaginary clients. The world’s most profitable hedge fund is in Japan

There’s a certain amount of angst about the effect of AI on financial sector employment.  Some people think that bankers are “the new coal miners” while others think AI offers a great opportunity to get close to the client instead of building Excel models and changing fonts on PowerPoint presentations. Everyone  seems to agree that the problem is to find a way of incorporating AI into the workflow without disrupting the process by which human capital is built.  Or to put it another way, if the AI is able to do all the work of compiling decks, building models and responding to “pls fix” requests, how will young bankers learn their trade?

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Lawrence Shaw, the head of workforce capability at Deutsche Bank, believes he has the solution. Shaw says the answer is that the juniors can start off by using their real intelligence on artificial clients.  Shaw says the job of a junior banker will have to change so that analysts and associates get into client-facing roles at an earlier stage, and that they will need to be trained in “how to take information out of the model and use it with the client”. 

Because nobody in their right mind is going to let a recent graduate say much in meetings on a multi-million dollar transaction, this training will involve a certain amount of simulation.  Shaw says that “we’re looking at using avatar client interactions for our junior staff” (as well as making more of an effort to take them along to meet real clients, on a supervised basis).

It’s not completely clear what this “avatar” will be – a full-scale ABBA Voyage-style hologram might be a bit overkill, but it might be a bit disappointing if all it means is the same chatbot, made up to look like a Bloomberg chat.  Possibly it will be somewhere in between; something that can simulate a video call, but which can’t be mistaken for anything you might invite to lunch.

Although it sounds science fictional, pilots have been training in simulators for ages, and many banks have used “war games” and pretend exercises as part of their process.  Adding AI into the mix just potentially makes the whole thing more realistic, and therefore better.

However, the trouble with simulator training (as anyone can tell you if they have tried to transfer paper-trading results to real money) is that a digital avatar differs from a real client precisely in the fact that you know they are just pretend.  If they get mad at you, it doesn’t really matter; if you lose them a ton of money, it doesn’t have any real effect on the bank.  It is a lot easier to develop good habits of clear thinking in this sort of situation, but there is a huge risk that all those habits suddenly desert you the first time you’re put under the stress of having high stakes.

Elsewhere, there is a multi-strategy trading shop out there which has been actively trading forex and short term interest rates way back since the 1990s.  Although it doesn’t publish audited results, its cumulative P&L in FX alone is about $345bn.  And when combined with rates, equities and other smaller strategies, its returns are credibly estimated to have been well above $200bn per year, every year for the last decade.

This enviable performance has been achieved, of course, by the General Account of the Ministry of Finance of Japan.  The overall benefit to Japan of its well-timed interventions in the markets has been of the order of 6% of GDP, an extremely useful boost to an otherwise quite tight fiscal position.  So why aren’t pod shops rushing to poach its traders and reserves managers?

We would suggest that this is mostly because it's significantly easier to trade macro when you’re working for the entity that makes the big macro decisions.  If any other hedge fund were to trade on the basis of confidential information about central bank and finance ministry policy, the regulators would probably get involved.  The most profitable trading desk in Asia is, unfortunately, the clearest example possible of the truism that often, people can look like market wizards, but all the value is in the franchise of the seat that they occupy.

Meanwhile …

Apparently, all the cute viral videos that Blackstone’s Jon Gray puts out (including his jogging series) are reviewed by compliance first, just in case. He notes that this means it’s easier for him to be a social media star than it is for junior bankers. (Business Insider)

Two medium-sized ponds get new big fish, as Bank of America promotes Simbah Mustasa and Sjoerd van Hooijdonk to be heads of investment banking in Africa and Benelux respectively. (Bloomberg)

The massive Goldman Sachs office in Dallas is still being built, and Aasem Khalil, the partner in charge of it, is trying to get the nickname “Y’all Street” to stick. (NPR)

Dymon Asia appears to be trying to break into the big leagues of multi-strategy.  After a number of top level hires in London, it has now recruited Jay Radia, a former Goldman Sachs employee who was most recently chief operating officer of BlueCrest’s commodities business. (Financial News)

“Tax loss harvesting” is the technique of optimising your trading strategy so that temporary fluctuations get turned into tax credits, allowing you to declare potentially millions in losses on a portfolio that’s trebled. It’s been industrialised as a process by Cliff Asness and AQR, to the extent that some people are worrying that the loophole will be closed. (Bloomberg)

For some reason, the rise of Ozempic has made a lot of people lose all sense of what kind of questions it might be appropriate to ask their colleagues. (Business Insider)

One of the great things about Australian financial media is that things like “controversy and disagreement over two executives’ job moves” get described as a “stoush”. (AFR)

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