Much has been written about Artificial Intelligence (AI) lately and today it seems impossible to have a conversation about the future of asset management without ChatGPT and similar tools being touted as potential game changers .
AI adoption is difficult, it is constantly evolving, and asset management companies that want to stay competitive would do well to take advantage of this technology. Ultimately, financial institutions that leverage AI in the investment process can increase their assets under management by 8% and their productivity by 14%, according to a Deloitte report.
The Deloitte report titled Artificial Intelligence, “The Next Frontier in Investment Management”, focuses on four pillars for transformation managers and they are:
- Alpha Generation – For managers looking for organic growth through improved performance, AI adoption has proven to make a difference in generating that extra alpha
- Improving operational efficiency: For automation of your operations, but also for turning your additional cost centers into AI-enabled as-a-service offerings
- Improving product and content delivery: Customer experience is the new battleground and AI is helping advisors generate more insights, personalize content for the customer more effectively and faster
- Risk Management: Equipping companies with rigorous tools for risk management and compliance operations, automating data analysis and anticipating and managing ambiguous events
According to the Forrester Future Fit survey, 62% of business and technology professionals at asset management firms expect spending on emerging technologies to increase over the next 12 months. Additionally, according to Market Makers, 9 out of the top 10 hedge fund managers representing the top 50 hedge funds plan to start using AI this year.
Will they replace people?
Goldman Sachs has predicted that artificial intelligence (AI) will replace 300 million jobs worldwide, most of them in the administrative and legal sectors, but it seems fund managers shouldn’t be breathing a sigh of relief.
In that report, Goldman Sachs noted that advances in AI are expected to have “far-reaching effects” for financial services industries, some of which will be positive.
However, a recent experiment by Finder.com suggests that some asset management features may be at risk. Thus, the website’s analysts compared the investment strategies of AI technology ChatGPT with those of key managers in the United Kingdom and found that the computer outperformed many of its human counterparts, including HSBC and Vanguard.
Analysts asked ChatGPT to build a portfolio of 38 high-quality company stocks using criteria drawn from the top 10 funds. And in the 40 days to March 23, 2023, the portfolio gained 4.93%, compared to an average loss of 0.78% for the renowned managers’ 10 most popular funds.
The results suggest that AI can outperform people in some cases, at least when it comes to index management, but will the same hold for active strategies?
It was reported last week that the CEO of Castle Ridge Asset Management has created an “evolutionary computing-based artificial intelligence system for active and dynamic portfolio management,” also known as Wallace. The system can analyze thousands of values for a fraction of the time and cost of using humans to do the same thing.
“WALLANCE requires a lot of resources, but far less than if we had hundreds or thousands of portfolio managers managing the same money. We have a great competitive advantage,” said the CEO. And he added that more and more fund managers are looking into harnessing the power of AI, and many are looking forward to incorporating it into their strategies. However, the difference with Castle Ridge is that most managers will position automation as a complement to their human portfolio managers, rather than a replacement…for now….
But there is no need to worry or fear, as machine learning presents many opportunities for managers to improve their investment process, risk management, alpha generation and customer experience. As technology takes over high-end jobs, many fear AI could put them out of a job. Although AI will be better at some tasks, the technology is not perfect.