Author Eric Wallach .- The Politic -

Antonio Simeone is Chief Executive Officer and Algorithmic Trader at Euklid, an Italian-based hedge fund driven entirely by Artificial Intelligence. Mr. Simeone is an Artificial Intelligence advisor at both The Aspen Institute and Agenzia Italia (AGI). He’s also a journalist for the Italian daily business newspaper, Il Sole 24 Ore, where he writes about Artificial Intelligence, FinTech, and startups. Previously, he founded Discover Bitcoin in collaboration with Luiss Guide Carli university in Rome, CASMEF (one of the most important Italian financial research centers), and Google Developers. He is the author of two books: Visions and Illusions of a New Global Economy and Psycho-ethical Economics. He earned a certificate in Yale’s Financial Markets course, taught by Nobel Prize-winning professor, Robert J. Schiller.

The Politic: Tell me a little about your background in crypto and blockchain and the work you’re doing!

Antonio Simeone and Giovanni Contini: We focus on two areas that are mainly in FinTech: Artificial Intelligence and blockchain. With regards to blockchain, we’ve been involved in the crypto space for many years– some of us even before the price of Bitcoin reached $10. One of our team members, Luca Venturini, even contributed to the creation of Bitcoin (part of the code that runs on every Bitcoin node was written by him). We saw this very interesting technology developing, and it was very, very interesting but kind of misunderstood by the market. In fact, it’s still misunderstood today, but you can’t imagine how misunderstood it was five years ago, or even before that. Still, Antonio in particular set up the first crypto-research space in Europe. He founded the Discover Bitcoin lab at LUISS Guido Carli University in Rome, and a team of people would work there on the crypto space.

As a matter of fact, despite Italy being very far behind when it comes to financial knowledge, and when it comes to the crypto space, Italy was and still is pretty advanced in crypto. Of course, it cannot compete with countries like the United States, London, or Singapore because the general ecosystem is made up of dinosaurs. Still, we did our best. We were curious, and we carried on with our research anyways. We really enjoyed and still do enjoy the aspect of transparency that the blockchain can provide. We were even talking about the technology before Ethereum was born. At that point, you didn’t know what a Smart Contract was yet, but you could still register a few characters of information on the Bitcoin blockchain; we exploited that for transparency, sharing all the details of our operations. This is as far as the blockchain is concerned.

On the other hand, Artificial Intelligence algorithms are our main asset. We develop these algorithms based on biocomputing, which means we try to replicate the laws of science with computers. This strategy is very helpful when it comes to trading and trying to predict the behavior of financial markets. At first, we used those algorithms to predict increases and decreases in the price of Bitcoin. Now, we mainly use our algorithms on traditional financial assets, meaning stocks, indices, commodities, or forex, for instance. We use Artificial Intelligence on every specific asset that we trade, and then we manage other people’s money. So, what we basically do–summed up–is manage people’s money through our hedge fund and use artificial intelligence and blockchain as part of our strategy.

What’s the story on the Yale Financial Markets Certificate that you earned?

I took the course on Yale’s website, about four years ago, when I was founding Discover Bitcoin– the first blockchain conservatory in Europe. I learned the basics of the market–the nature of financial markets and volatility–through the course, and I duplicated what I learned into the algorithms for Bitcoin and other cryptocurrencies. Afterwards, we generalized the algorithms to stocks and other assets.

How do you incorporate blockchain into your algorithmic trading?

The AI is basically separate from the blockchain. In one sentence, the blockchain serves as a decentralized register of information. The fact that it’s decentralized means that you cannot modify the information that is recorded on the register. The technology is very relevant to transparency. It can be used as a database as well, but it’s not very efficient as a technical solution because you have thousands of counterparties registering all the information that’s transmitted through the blockchain.

The only added-value we see right now is decentralization, which enables us to be transparent with our clients as to what we’re doing. This is pretty useful considering that hedge funds, in general, are not too transparent with regards to their strategy or the trades that they make. Of course, there are many other use cases of blockchain, but the key value we derive from blockchain is this: to be immutable and to enable absolute transparency.

That’s interesting. Why would other hedge funds want to adopt your technology? Don’t they benefit from the lack of transparency?

The problem is that, if you work in the investment space, you know it’s tough to fudge numbers. As a person working there, you would probably also agree that it’s kind of impossible to fudge numbers, to inflate your performance, or to hide fees and so on. But that’s a huge concern for our clients. On one hand, you constantly read news of scandals where there’s corruption with auditors. Sometimes you read about news where a guy working for a big bank screwed up and huge amount of money disappeared in a single transaction. Other times, you hear about money laundering– a huge amount of stuff that isn’t supposed to happen. But especially in Europe, these mishaps and fraudulent behaviors are a historic problem. It’s a serious problem that people can’t access information about how the funds they invest their money with are actually spending that money. It’s a failure in the investment industry.

The state of the industry is changing due to regulation, for instance with the European Union’s MiFID II (Second Directive on Markets in Financial Instruments). Regulators are trying to improve the degree of transparency that clients have, especially when it comes to fees. However, it’s still a bit of a mess in the sense that right now, hedge funds are basically forced to pay a bunch of service providers, including auditors, transfer agents, and administrators who calculate the net asset value and so on, in order to avoid scandals. At the end of the day, you’ll probably end up with four or five service providers who have to reconcile numbers almost every day, and at least once per month, depending on how frequently you need to declare your gains or losses. In our case, we declare our gains and losses every day and our NAV (net asset value) every week. If you need to have four or five companies constantly reconciling numbers when you only need two, it’s inefficient and expensive. But regulators want to see that.

Using the blockchain, you would have to corrupt hundreds of thousands of miners who register your information and your transactions. It’s not just about deceiving shareholders. To do that would cost billions and billions of dollars; it’s basically impossible. From our point of view, the future of the auditing industry is doomed because of blockchain technology. If you give legal value to information that is registered immutably on the blockchain, then you don’t need to pay $50 thousand every year just to have another company reconciling numbers. This is more or less our vision of why transparency is fundamental.”

To clarify, Antonio’s saying that the Bitcoin blockchain is immutable because of its widespread adoption. Since there’s a huge number of miners and transactions, of course, it’s exponentially harder to engage in corrupt practices.

Is your blockchain technology going to put the government out of business?

The SEC is the regulator, so it’s hard to put the government out of business, and I hope that doesn’t happen for your sake. But I don’t know. Companies like KPMG are all consulting firms as well, thankfully for them, but a good chunk of their business consists of auditing. We believe that their auditing business would disappear. The SEC would say, “Hey John, if you register your information on these decentralized legislators, then you don’t need to pay these auditing firms anymore.”

Basically, you’re taking out the middleman. There are a lot of different industries and situations where you could deploy that strategy– how’d you settle upon hedge funds?

The fact of your previous question, whether blockchain would even be of value kind of reflects the mentality in the industry: “Why should I bother to give clients all this transparency if I have all this money to manage, and I’m still making a bunch of money.” On the other hand, among all the industries you can think of, I believe that the financial industry is the slowest when it comes to innovation.

When we started our company, we could have leveraged all the Artificial Intelligence, partnering with somebody else to keep a big structure and all that, being more traditional in the way we would operate and structure our company. But our dream has always been to bring change to the industry, as far as customer services are concerned, because people don’t trust the financial institutions any longer. This fact is especially true in Italy, but I think it’s even more and more of a big problem around the world.

The problem is both due to a lack of transparency and a lack of innovation in general. This may consist of transparency as we said, e.g., hidden fees for clients or costs that are too high. People are scared to invest nowadays because they don’t know who they trust. Our vision is to radically improve the ubiquitous sense of mistrust and to bring out the value of a hedge fund, which is to manage people’s money– that’s it. If we’re good at managing your money and we make you some profit, then we’ve done our job correctly– otherwise, we shouldn’t be paid. The way we are able to realize this radical change is through the power of blockchain, because clients are able to verify all of our operations.

In addition to using blockchain, we also have a structure that’s based only on performance fees. Maybe in America, you only have performance fees, but we are not aware of any other funds implementing this incentive structure. I think this shows a lot of courage on our side and faith in our strategy. Again, if we don’t perform, we’re not getting paid. It can be troublesome, but we think that’s the way it should be, practically-speaking, and I think that our direction is one for the industry as a whole in the future.

Whose idea was the zero-management fee structure?

I can’t recall how it came to be, because it’s a very shared goal among the founding team. The underlying mentality is that we should only be paid if we deliver some quality. I don’t remember who translated this into the zero-management fee structure, but we all had this mentality, so it couldn’t be otherwise.