Now robots are replacing fund managers
In this era of disruptive technologies, AI is capturing almost all aspects of human life, including investment decisions. Artificial Intelligence (AI) technologies are designed to duplicate or surpass human abilities, especially in computational systems.
This week, a new exchange-traded fund debut on the US stock exchange which employs robots to pick stocks. The fund which is powered by IBM’s Watson artificial intelligence technology claims to be better than humans in picking stocks that would give higher returns on investment. The fund picks stocks based on a set of rules after analyzing data which include regulatory filing, news, and social media posts.
The invasion of the Indian investment world by artificial intelligence (AI) has been gradual, with a large number of fund houses employing computer algorithms or Robo-advisors in some form or other. The programs offer investment advice depending on investor's finance details. These services provide better coverage ratio and consistency which ensures that a large number of investors get unbiased and objective advice.
Also, on an industry-wide basis, there has been a shift of assets to index funds, which basically aims to reduce the cost of managing funds by effectively using computerized investment. Index funds are passively managed funds which mirror the weightage given a particular stock on an index to the proportion of investment made on the stock in its portfolio. The method literally eliminates the role of a fund manager.
Multiple studies have shown that active stock pickers generally underperform the wider stock market. This point is also highlighted in the much-talked-about bet between the world's most acclaimed investor, Warren Buffet and Ted Seides, a former fund manager. Buffett is slated to win the US$ 2 million bet he made in 2007. He bet that the US stock market's S&P 500 stock index would outperform hedge funds. The ace investor claimed that in the long-term, which in this case was a period of 10 years, active investments managed by hardcore professionals would underperform the returns booked by amateurs who were passively investing in the stock markets.
Globally, the shift to automation in fund allocation has been possible because today's investment decisions are based more on data and thematic assumptions which are replacing human judgment. Also, fund houses' shift to index funds is helping this trends. Meanwhile, in India, the debate is, whether passive investing would beat actively managed funds in an overbought market where cherry-picking is essential.