Bijesh Amin, co-founder of Indus Valley Partners, discusses the emerging high-frequency lending model and its impact on structured credit

Alternative asset managers see scope for investment opportunities in structured credit resulting from post-crisis regulatory changes, combined with the emergence of disruptive technologies, such as big data, P2P and AI. However, caveat emptor remains.

Hedge funds trading structured credit asset classes, such as MBS and ABS, are utilising disruptive technologies to take advantage of opportunities in the sector as a result of the 2008 credit crisis. Disruptive technologies - including AI, machine learning and big data - offer the scope for hedge funds to analyse, acquire and bundle the cashflows from a variety of asset classes at a scale that was previously unobtainable without the large securitisation platforms at investment banks.

Over and above recreating 'old' securitisation models, these technologies also offer the scope for creating entirely new structured credit products, as a result of big data and the emergence of new funding platforms. Underlined by the regulatory limits imposed on traditional providers of asset funding, such as credit card companies, mortgage companies and banks, these technologies could herald the arrival of a new set of fintech players into the marketplace.

Big data is not only about processing vast amounts of data, but also about how to manage unstructured, uncorrelated and 'noisy' data (for example, text, speech and images). Using these technologies, structured credit traders may have an edge in finding investable patterns in asset cashflows or signals in market data or in predicting outcomes from uncorrelated data. Typical traditional analytical models - for instance, in prepayment risks or defaults - are based on purely historical correlations.

In a related area, P2P lending platforms have emerged as credible sources of funding and are receiving close attention from several hedge funds and even banks. The emergence of a hedge fund-to-P2P-lending model, or as some have coined it a 'high-frequency' lending model, offers an intriguing possibility for a new era of securitised products. But is also poses risks.

There is a clear parallel in the pre-2008 era, when investment banks bought mortgages from mortgage origination companies or the origination companies themselves as 'fuel' for their securitisation engines to churn out products for yield-hungry investors. This model is to some extent being recreated from ground up, with hedge funds connecting directly to P2P platforms for the 'fuel' and then creating a new set of securitised products that can take a 6% unleveraged return and turn it into a 12% or 18% return.

However, the P2P lenders are not mature financial institutions and do not possess strong underwriting platforms or credible ratings from the big three rating agencies. In light of this, a fintech-enabled repeat of the subprime crisis is not something the economy needs right now. Caveat emptor.