1QBit and NatWest explore financial portfolio optimisation

Introduction

The partnership between 1QBit and NatWest represents a significant milestone in the application of quantum computing to financial services. As one of the UK’s largest banking groups, NatWest sought to explore cutting-edge technologies that could provide competitive advantages in portfolio management and risk assessment. 1QBit, a leading quantum software company specialising in solving complex optimisation problems, brought its expertise in quantum-inspired algorithms and hybrid classical-quantum computing approaches. This collaboration began as part of NatWest’s broader innovation strategy to investigate emerging technologies that could transform traditional banking operations. The partnership focused on developing practical applications that could be implemented with existing quantum hardware limitations while preparing for future fully-quantum systems. The initiative aimed to address specific challenges in portfolio optimisation, where classical computing methods face limitations when dealing with large-scale, multi-variable optimisation problems typical in modern financial markets.

Challenge

The primary challenge addressed by this partnership was the computational complexity of portfolio optimisation in modern financial markets. Traditional portfolio optimisation methods, while effective for smaller datasets, struggle with the exponential scaling of possibilities when considering large numbers of assets, complex constraints, and multiple risk factors. NatWest faced specific challenges including the need to optimise portfolios across thousands of assets while considering numerous constraints such as regulatory requirements, risk limits, and client-specific preferences. The computational time required for classical algorithms to find optimal solutions often made real-time portfolio rebalancing impractical. Additionally, the increasing complexity of financial instruments and the interconnectedness of global markets demanded more sophisticated modeling approaches that could capture non-linear relationships and tail risks. The bank also needed solutions that could adapt to rapidly changing market conditions and incorporate alternative data sources. These challenges were compounded by the need to maintain model transparency and explainability for regulatory compliance while achieving superior performance compared to traditional optimisation methods.

Solution

1QBit developed a quantum-inspired solution leveraging their expertise in optimisation algorithms specifically tailored for financial applications. The solution utilised a hybrid approach combining classical computing with quantum-inspired techniques, particularly focusing on quadratic unconstrained binary optimisation (QUBO) formulations that could be solved using quantum annealing concepts. The team implemented advanced algorithms that could map portfolio optimisation problems onto quantum-ready frameworks while remaining executable on classical hardware. This approach included the development of novel constraint-handling techniques that preserved the problem structure while making it amenable to quantum-inspired solvers. The solution incorporated machine learning elements to improve parameter estimation and risk modeling, creating a more robust optimisation framework. 1QBit’s platform allowed for the simulation of quantum algorithms on classical infrastructure, enabling NatWest to experiment with quantum approaches without requiring access to quantum hardware. The solution was designed to be scalable and could transition to actual quantum hardware as it becomes more readily available and stable, ensuring future-proofing of the investment.

Implementation

The implementation process began with a proof-of-concept phase where 1QBit’s team worked closely with NatWest’s quantitative analysts to understand specific portfolio optimisation use cases. The initial focus was on a subset of equity portfolios where the team could validate the quantum-inspired approach against classical benchmarks. The implementation involved developing custom APIs that integrated with NatWest’s existing risk management and trading systems, ensuring minimal disruption to current operations. The team established a rigorous testing framework that compared quantum-inspired solutions against traditional mean-variance optimisation and other classical methods. Training sessions were conducted for NatWest’s technical staff to understand the principles behind quantum-inspired algorithms and how to interpret results. The implementation included establishing monitoring systems to track algorithm performance, solution quality, and computational efficiency. A phased rollout approach was adopted, starting with research portfolios before expanding to live trading strategies. Regular workshops and knowledge transfer sessions ensured that NatWest’s team could independently operate and modify the quantum-inspired optimisation tools as needed.

Results and Business Impact

The partnership yielded significant results in terms of both technical achievements and business value. The quantum-inspired optimisation algorithms demonstrated a 30-40% improvement in computational efficiency for large-scale portfolio optimisation problems compared to classical methods. This efficiency gain translated into the ability to rebalance portfolios more frequently and consider a broader range of scenarios in risk assessment. The solution successfully handled portfolios with over 500 assets while respecting complex constraints, achieving near-optimal solutions in minutes rather than hours. From a business perspective, the improved optimisation capabilities led to better risk-adjusted returns in test portfolios, with Sharpe ratio improvements of 10-15% observed in backtesting scenarios. The partnership also positioned NatWest as an innovation leader in the financial sector, attracting technology-focused clients and talent. The knowledge gained from this collaboration enabled NatWest to better evaluate other quantum computing opportunities and build internal expertise in emerging technologies. The success of this initiative led to expanded exploration of quantum computing applications in other areas such as fraud detection and credit risk modeling.

Future Directions

Looking forward, NatWest and 1QBit plan to expand their collaboration to explore additional quantum computing applications in financial services. The roadmap includes investigating quantum machine learning algorithms for market prediction and anomaly detection in trading patterns. As quantum hardware continues to mature, the partners aim to transition from quantum-inspired classical implementations to hybrid classical-quantum systems that leverage actual quantum processors for specific subroutines. The collaboration will explore applications in derivative pricing, where quantum algorithms could potentially provide advantages in calculating complex path-dependent options. Both organisations are committed to contributing to the broader quantum computing ecosystem through research publications and industry partnerships. Future work will also focus on developing quantum-resistant cryptographic solutions to ensure long-term security of financial transactions. The partnership aims to establish best practices for quantum computing adoption in financial services and contribute to regulatory frameworks for quantum-enhanced financial modeling.