Asset managers need to embrace AI disruption.
“You never want a serious crisis to go to waste…. it’s an opportunity to do things that you think you could not before.” So said former Obama chief of staff Rahm Emanuel in an interview with the Wall Street Journal during the global financial crisis. For asset management firms, these words are very relevant today.
$80 trillion is currently invested by human strategies in the asset management industry. Despite recognising the critical role that technology will play in the evolution of the industry, unlike technology professionals, too few asset managers have invested in innovation to build-in resilience and stay ahead of emerging trends that are in full force today.
Crises are likely to accelerate new processes — and what better time to make a change than now? To think and do the previously unthinkable and un-doable.
Markets and trend patterns are evolving much more frequently than in the past — old trading models are dying out quickly which creates a significant threat to traditional asset managers. Trading models need to be kept current to tackle these rapidly changing, unpredictable markets but traditional fund firms are often too slow to respond.
Indeed, if there is one industry that would greatly benefit from the genuine adoption of artificial intelligence (AI) and machine learning (ML), it is investment management. Investing, in its simplest form, is about predicting the future. Investment predictions, like all predictions, are made by combining information with a model or method along with the assumption that managers have some advantage which allows them to make predictions that are more likely to be right than wrong.
However, this dusty model can and must change. The human ability to achieve this ever-elusive “alpha” is waning, resulting in the failure of managers to generate promised returns. A key reason for this is the continued reliance on the same information and the same old methods investors use to make decisions.
The use of AI in wealth management must be applied intelligently
Fortunately, advanced AI offers a way out of this rut. Machines have access to an infinite number of trading opportunities, so the models are constantly adapting to market trends, subsequently making them more dynamic. The human mind can step aside and allow AI systems to inform our decision-making processes.
Despite current market volatility, machines are always on the lookout for great opportunities throughout all points of the market cycle. The most significant challenge faced by investors is uncertainty.
However, the focus of humans and human-made models have long been on the strategic side of investing. With AI, the uncertainty is handed to an algorithm where the predictions and timings are completely automated. The influence of emotional and cognitive bias can thus be incrementally removed over time.
Advanced technology has begun to change as AI and machine learning takes an ever-greater portion of the asset management industry. It is invading further and further into the wider strategy domain, which was once the exclusive territory of human analysts.
Overall, asset managers must continue to develop systematic and scientific investment processes in order to generate sustainable risk adjusted returns for their trading activities — and only by embracing a truly new model can you really disrupt the market.