Kirill Ilinski

Kirill Ilinski (Russian: Кирилл Николаевич Ильинский; born October 1969) is a Russian-born British scientist, businessman and writer. He is the founder and Chief Investment Officer of Fusion Asset Management and Chief Executive Officer of Loyal North PLC. He is the author of "Physics of Finance: Gauge Modelling in Non-Equilibrium Pricing" (Wiley & Sons, 2001) and co-author of the two-volume book "In the Reflection of Supermodels: Tales of Models in Financial Economics" (Nauka, 2020) (Russian: В Зеркале Супермоделей, Наука 2020).

Education
Ilinski graduated from Saint Petersburg State University with the MSc in an Physics in 1992 and received a PhD in Mathematical Physics from St. Petersburg Department of Steklov Mathematical Institute of the Russian Academy of Sciences in 1994. He held several research posts before moving to JPMorgan, which he left in 2004 to set up Fusion Asset Management.

Early life
Ilinski was born in October 1969, to nuclear physicist Nikolay Ilinski and lawyer Vera Ilinskaia. His father was one of the favorite students of soviet physicist Anatoly Alexandrov. He worked on the first Soviet nuclear-powered icebreaker, Lenin, and the first Soviet nuclear-powered submarine, K-3 Leninsky Komsomol. His mother, Vera Ilinskaia, was a judge at various courts in St-Petersburg, including St-Petersburg City Court and St-Petersburg Statutory Court, eventually retiring in the rank of 2nd class Active State Councilor of St-Petersburg. After attending Boarding School No 45 (now Academic Gymnasium at Saint Petersburg State University), Ilinski joined the Physics Faculty of Leningrad State University, graduating with honors in 1992.

Scientific Career
In 1994, Ilinski wrote his PhD thesis at the St. Petersburg Department of Steklov Mathematical Institute of the Russian Academy of Sciences under the supervision of V.Popov and N. Borisov on the application of supersymmetric quantum field theory methods to differential geometry and index theory. The results found new relationships between analytical and topological properties of meromorphic functions on non-compact Riemann and Klein surfaces (a generalization of Chern-Gauss-Bonnet theorem). He then joined the Theoretical Department of the Institute for Spectroscopy at the Russian Academy of Sciences and worked with V.M. Agranovich. Ilinski maintained this position until 2000, even when he physically left Russia and became a post-doctoral research fellow at the School of Physics and Space Research of the University of Birmingham in 1994. During this time, he published extensively on various problems in condensed matter physics, quantum optics, fractional quantum statistics and complex systems.

During a break between contracts at University of Birmingham in 1996, Ilinski returned to St. Petersburg and attended a complete course on financial economics at the Institute of Economics and Finance. He left without a degree to return to the U.K and began working on the gauge theory of non-equilibrium pricing.

Gauge theory in non-equilibrium pricing
In 1997, Ilinski suggested a fundamental link between arbitrage in financial economics and the definition of curvature in differential geometry and fiber bundles. In this picture, discounting is equivalent to parallel transport in time direction, while exchange between assets can be described as a parallel transport in "space". For the first time, the theory allowed consistent descriptions of prices (gauge fields) and asset flows (matter fields) within the same theoretical construct, similar to fundamental physics theories. In the theory of fiber bundles, a non-trivial result of parallel transport along a closed loop is equivalent to a non-zero curvature. In contrast, in finance, the non-trivial result of the closed loop of financial exchanges is a definition of financial arbitrage. This observation, together with some first principle dynamic assumptions, led Ilinski to a formulation of a stochastic dynamical theory of financial operations as a quantum field theory with a local group of dilatations as a gauge group. This was first studied by Hermann Weyl in his quest to link electrodynamics and general relativity. The presence of arbitrage is a feature of non-equilibrium, while most standard financial pricing theories assume arbitrage-free, equilibrium asset pricing. Non-equilibrium asset pricing describes the short-term economic inefficiencies and bubble and crash dynamics far from equilibrium. In 2001, Ilinski published his book "Physics of Finance: Gauge Modelling in Non-Equilibrium Pricing", describing non-equilibrium extensions for derivatives pricing and modern portfolio theory.

The gauge theory of arbitrage was popularized and further developed by several authors, most notably by Simone Farinelli and co-authors of Geometric Arbitrage Theory (GAT). The original theory had attracted some criticism from some authors, including D.Sornett and N.Taleb.

Financial Career
In 2000, Ilinski started his financial career, joining Chase Manhattan Bank as a quantitative analyst in the European Equity Derivatives group in London, where he supported the exotic derivatives desk and started forecasting VIX for the bank's clients. After the merger between Chase Manhattan Bank and J.P. Morgan, Ilinski worked in options trading, focusing on proprietary modelling and trading. His work on multi-asset generalization of local volatility required for exotic option pricing led him to find a multi-dimensional analogue of the Breeden-Litzenberger formula for risk-neutral distribution. This showed that the multi-asset probability distribution is a Laplace transform of basket option prices over basket weights.

In 2002, Ilinski was invited to join the Equity-Linked Products Group, where he developed cross-asset risk management strategies and co-founded the JP Morgan Debt-Equity Relative Value Group. He and his team developed the "Credit Risk Reversal" model for hedging credit and equity derivatives, cited as one of the key achievements when JP Morgan won the IFR "Derivative House of the Year" award in 2003. The model was used in a portfolio/index form to buy baskets of credit default swaps funded by selling combinations of index options. These trades represented macro capital structure arbitrage, aiming to provide better hedging for the bank's global convertible bonds book and part of the bank's loan book.

Fusion Group
In 2004, Ilinski left JP Morgan to set up Fusion Asset Management, which developed into Fusion Group of companies. The group comprises, among others, investment management (Fusion Asset Management LLP), retail investment advice (under the name of Loyal North PLC) and wealth management (under the name of Symbiotic Capital Management). The group has around £2 billion of assets under management.

Fusion Asset Management was the founding company within Fusion Group. Its first fund, Fusion Credit Relative Value Fund, was launched in 2004 to specialize in various forms of capital structure arbitrage. Ilinski was also a Chief Risk Officer and a manager of the long volatility strategy. The strategy emerged as a long-gamma analogue of the optimal gamma hedges that Ilinski developed for the J.P. Morgan Index Options desk in London in 2001-2002, after significant short-gamma losses of options trading books caused by the September 11 attack. The long-gamma component within the fund generated a 20% return on capital employed within the strategy in one day during the 7/7 London bombings in 2005. Following this success, the firm decided to develop the long-gamma component into a stand-alone strategy as a Fusion Long Volatility strategy and fund. The strategy was one of the top performers during the crisis months of 2007 and 2008, 2011 and 2014.

Ilinski became Managing Partner and Chief Executive Officer of the firm in 2006, following the departure of the other two founders.

Under Ilinski's leadership, in 2010, Fusion Asset Management was the first in Europe to start offering F.X. Liquidity Hedge to financial institutions and corporate clients, utilizing a combination of long vanilla and barrier options to protect against large downside moves.

"We all remember only too well the liquidity crisis of 2008, when F.X. hedgers (who had "perfectly hedged" their market risk with currency forwards) were left facing a cash crisis when the mark-to-market on their forwards became largely negative. This exposed some hedgers, such as funds of funds, to margin calls on their forwards and others, such as corporates, facing threats to their credit lines. (Ilinski)" 

Offering the Liquidity Hedge took Fusion outside the traditional asset management space into risk advice and treasury management, which grew in the following years. Ilinski further developed the concept of firm-wide economic risk. According to him, hedging some parts of risk in isolation, like F.X. risk or interest rate risk, can damage the firm's overall risk. He shows that before any risk-mitigation decisions, and as a part of risk analysis, the enterprise performance characteristics must be modelled holistically as functions of tradable asset prices (supermodels) using the copulas technique. Moreover, some tail risks are a natural part of the business and are better left unhedged but sized accordingly.

In further developing corporate advisory offerings and contributing to the Theory of the firm, Ilinski and his colleagues developed an option-based export readiness model within the context of the Uppsala model of Internationalization and the ESG-readiness model. The former explains how to account for the export readiness in a firm's enterprise value. The latter sets up the Uppsala-type model in the context of sustainability transition as a stage in the firm's life cycle and models the firm's economic success of such transition.

In 2016, Ilinski added Loyal North PLC to Fusion Group in the push to provide institutional-level services to retail clients across the U.K. and became its Chief Executive Officer. Loyal North is a nationwide holding and operating company for independent financial advice firms in the U.K. The feature of Loyal North's proposition is that the company does not consolidate acquired firms but runs them independently, thus saving the culture and heritage of High Street local firms across the country.

Ilinski became co-CEO of JustFA Technology when it was launched in 2022. JustFA facilitates regulated financial advice for lower-income clients in the U.K. who otherwise could not afford it.

Other work
Ilinski pioneered the idea that arbitrage return (generally – mispricing) can serve as a signalling variable (Physics of Finance ) in Hyman Minsky's theory of bubbles and crashes as described by C. Kindelberger in his book on the financial crisis. The variable shows how far the financial system is from equilibrium which is a necessary element for non-equilibrium financial pricing far from equilibrium. Ilinski criticised early versions of the D.Sornett crash log-periodic model. In his section "Anti-Taleb" (v.2 Chapter 11 of "In the Reflection of Supermodels"), Ilinski also criticized the application of N.Taleb's Black swan construct to finance, arguing that monitoring extended financial positions and understanding existing incentives are essential explanatory variables ignored in the constructs. This philosophy was part of Fusion Asset Management's protective products offering from 2004, which performed during the 2007-2008, 2014 and 2020 crises. Reducing systemic risks to the financial system and enhancing economic growth by changing performance fee structures was a prime motivation for Ilinski to develop his proposition on Shock Absorber Fees.

Following the Global Financial Crisis (GFC) of 2007-2008, Ilinski argued that the cause of the crisis was due to wrong incentives for financial participants prior and that the participants acted rationally under the existing compensation structures. As a solution to this Principal-agent problem in the context of financial management, Ilinski introduced The Shock Absorber Fee (SAFe),  a special performance fee structure aimed to reduce the systemic risks involved in hedge funds, asset management and banks.

The structure was presented to UKTI, H.M. Treasury, and FCA and was discussed at the International Centre for Financial Regulation but ultimately was not followed since the decision to cap bankers' bonuses was implemented across the E.U. in the wake of GFC. The cap was formally scrapped in the U.K. in October 2023, as the conservative government used Brexit to exit some post-GFC E.U. reforms.

In October 2018, Ilinski presented at the workshop on sovereign Disaster Risk Reduction organized by the United Nations Development Program. This was followed by research on the impact of natural disasters on credit risk, climate risk and climate risk management.

From 2012 to 2016, Ilinski gave lectures on models in financial economics at the European University at St-Petersburg, Department of Economics. After the lectures became available at the online education portal Lectorium.tv, he became one of the most watched financial lecturers in the Russian Federation at that time. Expanded, updated and supplemented by previously unpublished results, these lectures were published by Nauka in the two-volume book "In the Reflection of Supermodels: Tales of Models in Financial Economics" («В Зеркале супермоделей») co-authored with Maxim Bouev in 2020. The book won second prize as "Business Book of the Year in Russia" from PwC in 2021.

Personal life
Ilinski is married to Alexandra Ilinskaia, whom he met at university. She also received a PhD in theoretical physics from St Petersburg University and co-authored early papers with Ilinski. After obtaining a Royal Society Nato Fellowship at the School of Physics and Space Research of the University of Birmingham, she went to work for Australia and New Zealand (ANZ) Investment Bank and later Credit Agricole as Managing Director. After leaving Credit Agricole, she became Managing Partner at Fusion Asset Management and Director of Loyal North PLC and JustFA Technology.

Ilinski has two children:

Daria Ilinskaia (stage name Sasha Ellen; born 1989) is an actress, writer and comedian.

Alisa (Juni) Ilinskaia (born 2009).

Links

 * Physics of Finance - review by Cosma Rohilla Shalizi, Statistics Department, Carnegie Mellon University