Hedging Corporate Currency Risk gets a Boost with 21Strategies
An effective team player, with varied experience in distributed intelligent systems, international corporate law, compliance/tax law and accounting, Yvonne Hofstetter has been a trend setter in the field of Artificial Intelligence (AI). An ardent reader, Yvonne is also a published author. Her best-selling non-fiction books on the political impact of AI, including the End of Democracy, the Invisible War, and They know everything earned her some rave reviews.
Her in-depth operational skills with operating autonomous algorithmic trading systems for international currency markets, coupled with expertise in currency exposure management, has given her an edge in the industry.
As an industry expert, Yvonne believes that Next-gen AI is a cognitive machine which is able to autonomously make optimal decisions in complex situations. As the CEO & Co-Founder, MD, 21strategies GmbH, a B2B deep tech company, she is at the helm of affairs. She speaks on an array of topics – from the growth for enterprises across industries to AI’s impact on hedging corporate currency risk, from the conception of 21strategies to the pandemic effect on the industry. Excerpts from the interview:
Conception of 21strategies GmbH
21strategies is a B2B deep tech company that aims at transforming how organizations make tactical and strategic decisions. Noting that the company also focuses on the defense domain, Yvonne observes that the founding of the company can be traced back to when the governmental defense budgets were reduced after the fall of the Berlin wall. “This led to Wall Street absorbing mathematicians and physicists who worked for defense earlier. “As ‘quants’, they reigned Wall Street. My team was part of this movement – we provided AI for the back then largest pure US currency hedge fund.”
When Big Tech started to acquire AI companies in 2013/14, the civil sector understood that AI formerly built for the defense sector would proliferate to the benefit of businesses, too. “It was Google’s AI strategy which finally spurred the broader acceptance of AI. Before that, a typical European corporate was hostile to AI.” She also points out that the financial crisis of 2008/9 was a decisive point. “My team researched how a cognitive machine would serve the treasury departments and in-house banks of large corporates rather than the financial services industry with their cluster risk. After piloting HEDGE21, the company’s flagship SaaS product, in a field test, with a German commercial bank, 21strategies formally took shape and funded during the first COVID-19 lockdown in March 2020. One year later, we are revenue-effective and seek to grow.”
The Flagship Solution – HEDGE21
The company’s flagship AI ‘HEDGE21’, is a cognitive machine, that fuses external data and information from the markets with company-internal processes and constraints to compute the optimal hedging strategy under uncertainty. It acts as a tool for better decisions to hedge currency exposure. “To the corporate treasurer, HEDGE21 looks like a virtual assistant. It’s interesting to observe that some human treasurers want to compete with the machine – and recognize that they cannot beat the ‘chess computer’ or the ‘Google AlphaGo’ built for the real world.”
HEDGE21 has two components: An algorithmic prognosis predicting how the market for a certain currency or commodity will evolve. “This multi-sensor data fusion resembles a weather forecast model and is forward-looking between 5 days and 6 months. It connects with reliable data providers such as Refinitiv/Reuters and Bloomberg for quantitative data, but also fuses behavioral finance or other qualitative data to gain situational awareness.” The second component is the decisioning algorithm – this is 21strategies’ completely proprietary tech stack, adds Yvonne.
HEDGE21 can be operated as stand-alone system completing the treasurer’s IT ecosystem of ERP systems and electronic trading venues. Once fully connected at both ends, the hedging process becomes fully automated with man-on/out of-loop. In contrast to solutions provided today, HEDGE21’s automation is a smart and adaptive closed-loop control cycle rather than an old-style rule-based process automation.
Pandemic’s Effect on Hedging Corporate Risk
The COVID-19 pandemic is also owed to the dynamics of a highly connected global world, according to Yvonne. “As we proceed with digitalization and the hype-connectedness of the ‘Internet of Everything’, we even further increase the dynamics and complexity of our lives. In such complex dynamic environments occur decision-making situations in which a future state cannot be predicted with certainty. This imposes new risk on businesses”, observes the entrepreneur. Corporates have multiple options moving forward into the future, depending on varied factors like volatility, uncertainty, and ambiguity of the markets. “An example is the hedging of currency exposure – when, at which price, and how much of a foreign currency risk shall an international corporate hedge to protect their operational margin from adversarial price moves of currencies. Next-gen AI is a cognitive machine which is able to make optimal decisions under uncertainty – can be of great help here.”
Case study 1: HEDGE21 extends its supports to steel traders in two aspects. First, it makes decisions as of when and how to hedge physical steel transactions profitably with steel derivatives at metal exchanges. Thus, it supports the steel trader managing flat price risk in financial markets. Secondly, steel traders use it to understand the market dynamics of the steel price evolution to find the best timing and sizing of a physical steel transaction, reducing their flat price risk. HEDGE21 protects the margin of physical steel trading against spread risk, thus helping it make better steel procurement decisions.
Case Study 2: To smoothen EBIT oscillation from currency swings, a stock-listed chemical company manages their USD receivables using HEDGE21 – a rolling portfolio of $60 MN. USD exposure is handed over to HEDGE21 at the first day of a quarter and then managed profitably by the machine until the hedging period ends on the last day of the quarter. “While HEDGE21 observes the company’s process constraints such as passive investing vs. active investing, hedge policies, maturity dates, benchmark, time to go or P&L made, as well as the actual market situation, once every day during the hedging period it computes the best hedge ratio for the exposure, eventually corrects an earlier decision to amend the hedge to the market situation and alerts the trading desk, which decides whether to follow the machine’s advice or not.”
“Being leader means serving my company and its stakeholders for me. I consider myself being a conductor of my team, and I lead co-operatively. As a CEO, I need to delegate and share power. This requires that I put trust in good staffers and turn them loose to contribute to 21strategies’ corporate goals.”
Awarded a renowned German political award for outstanding democratic behavior, Yvonne feels she is a responsible employer and a lawyer. She upholds her ethical concepts and norms, and as honorary professor for digitization and society, she also trains her students accordingly. “I am pretty fearless –risk-taking and testing limits. That was already the case when I was a child. It is character more than education. And I am a hard worker.”
A Word of Advice
“Time is a big issue for startups. Usually, things take much longer than expected. B2B startups need time to fulfill procurement requirements. Their clients need time being convinced of a new offering. Revenue is being realized later than planned. Fundraising takes time, while liquidity melts down. Liquidity becomes an issue when the time risk homes in.”
Rather plan for a startup marathon than a sprint, and act, accordingly, advises Yvonne. If a startup relies on an equity investor, the investor should be of good fit, as the parties will be coupled for some years. A startup should do a proper due diligence of a potential investor. It is of importance that the investor’s fund maturity is not looming in the short-term; this will put time pressure on the startup to make an early exit.
The Success Mantra
“Once an entrepreneur – always an entrepreneur. This is decision-making under uncertainty at its best: You choose the entrepreneurial path, which is almost a decision for life.” Being leader means to me: serving my company and its stakeholders. What it is not to me: a status symbol. I consider myself being a conductor of my team, and I lead cooperatively. As a CEO, I need to delegate and share power. This requires that I put trust in good staffers and turn them loose to contribute to 21strategies’ corporate goals. Specific female properties which deem women being “better” or “different” CEOs I do not see. Personally, I am not more emotional or understanding or cooperative than my male colleagues. However, I love complementing my male colleagues. They have their capabilities, I have others. Together, we are a winning team.”
If leaders developed an attitude that there is greater meaning of life than mere economic success or failure, this has a two-fold effect. First, it makes leaders more risk-taking – which is generally good for today’s societies which must develop a different stance to risk and, consequently, to innovation and startups. European societies are too much pampered by Big Government, and too many people rely on the state being their problem-solver. That’s an unhealthy development. Second, it comforts leaders after a failure. Life does not come to an end only because we failed. Failure will open new perspectives and options. Life goes on despite a failure, and it has many beautiful offerings: the family, the nature, the human intellect, or even religion. You name it. Find one, exercise one, trust it – then stand up and move on.
Journey with AI
“People are skeptical of the superiority of cognitive machines in certain domains. Some even doubt that such a class of machines exists; but then they never studied the development programs of the military-industrial complex all around the world.” Everywhere this class of machines is being developed – or learned or trained – today. Doubtful customers – the mainstream or laggards – are still not the clientele for cognitive machines today, observes Yvonne.
She adds that corporates are very open to the deployment of cognitive machines when they have strategic pressure. They rely on a machine that secures their margins or gives them a competitive edge that is directly reflected in the corporate’s finances. “But even innovators and early movers need to trust such a class of machines first. You only gain trust over time. Time plays a big role here. You have to plan for sufficient test time for man-machine teaming.”