How far are we from using AI in asset management?
Every now and then some trends emerge both technical and otherwise that engulf the entire industry including manufacturing and services. Machine learning, Artificial Intelligence (AI) and big data are the current trends that are changing the way we operate and manage our businesses. There are industries and sectors that have already successfully embraced this phenomenon and reaping its benefits. The asset management company (AMCs), however, are yet to fully get a hold of this latest fad. AMCs are still in the process of evaluating how this can be used to design better investment strategies.
Big data for many is a collection and analysis of large and complex information datasets, that has three Vs, that is volume, velocity and variety. Volume refers to the amount of data, variety refers to the number of types of data and velocity refers to the speed of data processing. Such data is increasingly being used by companies to analyze and predict the behaviour of consumers. Meanwhile, AI can be defined as the use of computational tools to perform tasks that traditionally required human thinking. Machine learning is an application of AI that provides systems with the ability to automatically learn and improve from experience without being explicitly programmed.
Although these may bring invaluable insights into fund management companies, there is hardly any evidence that machine learning, big data and AI are being used extensively. Concrete cases of investment managers able to deliver consistent outperformance in real life using these techniques are still absent. The reason being investment communities may not be able to establish a clear economic rationale between inputs and outputs. And most of the times what is tested on paper may not always be the same way in practical life. Since AMC are managing other’s money, they need to be extra cautious of using any such tool, until and unless they are confident that it will work.
Therefore, it will still take 3-4 years before we can see AMCs harnessing Big data, machine learning and AI to generate alphas for their investors.