Massive AI disruption predicted as first strategy hits Asia

Mar 15, 2018

With artificial intelligence poised to become a driving force for the investment management industry, human fund managers are on notice, some industry players believe.

Massive AI disruption predicted as first strategy hits Asia

Technology experts predict massive disruption in the asset management industry over the coming years as artificial intelligence (AI) increasingly takes hold and is adopted to manage funds.

With the launch on Thursday of the first China-focused AI-run strategy for institutional investors, the starting pistol for that change now appears to have been fired in Asia. So human fund managers in the region beware and get ready to retrain.

Financial firms spent more than $1.5 billion on AI-related technologies in 2017, according to US research firm Opimas, which expects the replacement of human portfolio managers to accelerate as that annual spend picks up to $2.8 billion by 2021.

AI refers to the creation of intelligent machines that work and react like humans. Machine learning, the science of getting computers to act without being explicitly programmed, is the process upon which most AI is being built. It requires vast amounts of data to train a system and fine-tune it.

“From my perspective, I think we might see virtually all discretionary traders lose their jobs – we’ll need one-tenth of the amount of trader positions that we have now,” said Gaurav Chakravorty, chief investment officer at qplum, a US-registered asset manager that offers AI-based trading strategies.

“A typical asset management firm will soon have more machine-learning engineers and data scientists than people with experience in financial markets,” he said.

Against that broader backdrop, mainland Chinese investment specialist China AMC has launched an A-Share multi-factor strategy, which is being made available for the first time to Asian institutions on a managed account basis, having teamed up with Hong Kong-based fintech firm Magnum Research. The latter's Aqumon automated investment engine was created at the Hong Kong University of Science & Technology and funded by the Alibaba Entrepreneurs Fund.

"AI is going to be a driving force for the investment management industry," China AMC’s head of exchange-traded funds, Frederick Chu, told AsianInvestor, as he explained the new strategy, which is based on a machine-learning stock-picking algorithm. The algo applies a smart beta-like multi-factor approach, making changes according to different market cycles.

By using advanced AI techniques, Chu said the new strategy is able to identify the most effective factors to harness excess returns. It has outperformed the CSI 300 Index during backtesting for the last two years. And since the whole process, from data analysis to risk control and trading, is fully automated, the strategy can be offered at competitive fees that are comparable with passive products in the China space, which are typically between 40 and 75 basis points, he added.

FUTURE IS NOW

Kelvin Lei, chief executive of Magnum Research, said the pressure was on for the industry to adapt: "The technology around AI algorithms is mature and I think the traditional fund managers need to catch up."

Chakravorty of qplum estimates that every year, the asset management industry takes in about $1 trillion in revenue, more than half of which is invested in human capital. “We’ll see a stark reduction in this number, mostly because fees have to come down,” he said.

A report by Opimas in March last year predicted that by 2025 the global asset management industry will shrink by 90,000 people (out of total industry figure of 520,000 ) to be replaced by machines.

The big ETF players are yet to bring AI products to market though. Blackrock's iShares division has filed with the US Securities & Exchange Commission for a series of actively managed equity ETFs using AI.

State Street’s head of ETF strategy & research in Asia, Matthew Arnold, said his firm doesn’t have any AI ETFs at present. Larry Wang, head of marketing at CSOP Asset Management in Hong Kong, said "We have been studying AI-themed products for a while and also have the intention to issue related products, but not in the near future."

In an interview with Bloomberg last December, Hiromichi Mizuno, CIO of Japan's Government Pension Investment Fund, said he believes AI will either replace or enhance the asset managers’ work.

"Asset managers will have to adjust their conventional business model. Investors will be more focused on the long-term investment theme, as AI will take over the short-term trading. In other words, investors will shift their focus to the long-term sustainability of their portfolio. I wouldn’t be surprised if a lot of people lose their jobs because AI replaced their routines."

But Mizuno said he also believes in the power of the human element. "The long-term thinking and the ESG-like non-numerical, non-quantitative information will continue to require human interpretation. I believe AI will release the human resource to do something else."