Qraft Technologies’ Oh comments on firm’s ambitions and the rise of active ETFs

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2019 saw South Korean firm Qraft Technologies launch its first two ETFs, through US white labeller ETC, using an investment process based on a proprietary artificial intelligence (AI) security selection process that extracts patterns from analysing data.

Francis Oh (pictured), newly appointed Managing Director and head of the APAC office for the firm, explains that Qraft has some USD150 million under management, and, apart from listing ETFs, also works with financial institutions to enhance their efficiency using AI technology.

“We are aiming to be the next Renaissance Technologies,” Oh says. He comments that there are too many competitors in the plain vanilla passive ETF business. “If you look at the one who delivers the best risk-adjusted return, it’s quant driven hedge funds but if you look at their operational process we see it as ironic that even though they are top class, most of them are labour intensive.”

Oh believes it was easier to find alpha more than 20 years ago, but after the global financial crisis and now the Covid pandemic, it’s even more difficult. “It’s harder and harder to find alpha, so they use more resources that keep delivering, but the old alpha is decaying in the market,” he says.

“We think that we have the right approach as AI technology could be delivering a better solution than the humans. We are confident that our AI technology in large caps will deliver a better active index and achieve higher alpha at low cost,” he says.

“The upside with AI is its ability to capture non-random patterns from price data, fundamental data, macro data, etc. to create meaningful strategies fast, like an autopilot for constructing portfolios. Our ETFs take advantage of this process to predict optimal portfolios and maximise risk-adjusted returns, providing diversification rather than a narrowly focused thematic approach.”

The firm is now working on creating more actively managed ETFs, either alone or with existing index providers.

Oh is an APAC ETF veteran and self-proclaimed ETF enthusiast, having started at Mirae Asset Management, where he was an ETF portfolio manager, then moved to thematic ETF provider Direxion ETFs and then to Vanguard, where he was head of South Korea for ETFs and Ucits funds.

He observes that the big trends in the ETF industry have changed with the first two decades dominated by the passive ETF, then the rise of factor or Smart Beta ETFs, and now the rise of thematic and actively managed ETFs.

“Thematic ETFs are gaining huge momentum at the moment,” he says. “It’s driven by various factors affecting the current fever or hype or even love for thematic ETFs. Those reasons include a need for investors to find diverse returns, whether they are retail or institutional and also a more prosaic reason.”

“Covid 19 has affected a lot of our lives and the consequence and impact is that people have started to take more of their time for investment and using fintech supported online brokerages. It’s making it easy for individual investors to express their views, which could be quite different from institutional investors and not the traditional approach to portfolio construction but more reflect their personal interests.”

In this camp, Oh includes the rise of ESG. “Someone working in fintech might believe that ESG investment is changing the world and this can be expressed in ETFs. It’s not just a short-term trend but a substantial change for the ETF industry.”

Commenting on the APAC market for ETFs generally, he says that it is very fragmented, without the fund passport approach inherent in the Ucits and Sicav structures in the European market.