Ever since ChatGPT burst into the public consciousness in November 2022, AI, is suddenly a dominant theme in the news. The popular language model, with over 100 million users, is providing users with a glimmer of what AI is capable of, and, more importantly, it is accelerating the debate over the technology’s potential benefits and threats to humankind.
Meanwhile, the investment community has been researching and experimenting with ML and algorithmic models for more than two decades. According to an April 2023 study from Hedgeweek, an estimated 40% of all hedge funds and more than half of funds over $1 billion are using AI in some form to drive investment returns.[1] The applications span a spectrum from firms using it as a research or screening tool to a handful of managers using it for “autonomous trading” – in other words, turning machines loose to make investment decisions and manage portfolios, with minimal to zero human intervention.[1]
What’s a virtual portfolio manager?
In May, my colleague, Aani Nerlaker, Senior Director, Solutions Management, participated on a webinar panel led by Hedgeweek exploring the use of intelligent technologies in investment management, as well as in operations. Speakers from Spire Fund Advisory and Castle Ridge Asset Management joined Aani on the panel. The conversation explored the capabilities of autonomous trading and its ability to process billions of data points overnight and present thousands of fully formed portfolio strategies the next morning. These “virtual portfolio managers” make decisions free of human bias. Further, they adjust to changing market conditions, often run contrary to conventional thinking, and deliver superior absolute returns most of the time without regard to popular benchmarks.2
The panel agreed that the pure autonomous trading model is still in the minority of AI usage. Most firms focus their intellectual capital on investment acumen, whereas autonomous traders require people with a deep understanding of algorithms and models. Many firms don't completely trust the technology and prefer human oversight on automated decisions – even though human interference often impacts good trades, according to AI proponents. These understandable reservations have slowed the wider adoption of AI-driven investment strategies – for now.
Are robots taking over back-office operations?
Ironically, AI has made more headway in front-office decisions than in middle- and back-office automation. According to Hedgeweek, only 13% of fund firms report using intelligent technologies in their internal operations.1 Aani isn’t surprised by that figure. More fund managers are outsourcing some portion of their operations. Instead, they are relying on their fund administrators and service providers to stay ahead of the curve on technology rather than investing in it themselves.
As a managed services provider, at SS&C we are beginning to leverage optical character recognition (OCR), natural language processing (NLP), and other innovative technologies in our service offerings. The team is also working with SS&C Blue Prism, our intelligent automation developer within SS&C, to explore ways to delegate routine daily processes, such as reconciliation and accounting functions, to “digital workers.”
From digital workers to virtual portfolio managers, there can be little doubt that AI is likely to reshape investment management front to back sooner rather than later. The ”Turning Point” webinar shows what’s possible in the near future, and, more importantly, what is already happening in an increasingly AI-powered marketplace.
[1] “Turning Point: The New Technologies Helping Hedge Funds Evolve,” Hedgeweek, April 2023
