How AI Drives Investment Success: A Game-Changer Strategy
The asset management industry is at a tipping point, thanks to AI. A study by Coalition Greenwich’s global in 2023 of 99 large asset managers specifically on AI adoption and approach found that only 9% have not considered AI, all the rest were in various stages of evaluation, adoption or development of AI applications. In recent years, financial markets have undergone rapid change, characterized by unprecedented data generation and complexity. These developments have compelled wealth and asset managers to adopt AI-based solutions for several aspects that crisscross operations, competitive offerings, and client relationships. While, for the most part, asset managers expect internal process improvements and optimization along with cost savings, they are also considerably excited about AI’s potential in augmenting their investment research and marketing functions. Across the board, financial advisors continue to discover the value of bringing AI into the investment process. This has been reaffirmed by various surveys including a 2021 Deloitte study finding that firms who have implemented AI-based solutions in their investment process have seen productivity increases of 14% as well as their Assets under Management (AuM) growing in excess of 8%.
The state of AI utilization in asset management
Understandably, AI adoption has not been uniform across asset management firms. Depending chiefly on the extent of risk that the asset management firm is willing to take with this evolving technology, it has effectively split the field with the pathfinders (28%), active practitioners (17%), and watchful users (46%) according to the Coalition Greenwich study. Pathfinders, in the first category, have shown a greater readiness to using AI in ways that haven’t been explored before. Watchful users on the other hand form the largest category who have opted for a restrained, watch-before-we-leap approachThe main takeaway here is that not using AI is not an option anymore. Even those yet to accept AI unreservedly admit to being intrigued by its potential and will be bound to regard it more seriously at a later stage. Many view AI as an enabler of major improvements in portfolio performance and client services and are most comfortable with AI applications that promise process efficiencies and augmented intelligence. However, there is plenty more to be gained from embracing AI along the value streams of business — especially with asset managers under pressure to diversify revenues and improve personalization of portfolios for clients. This is owing, in part, to the fact that the technology itself continues to improve by leaps and bounds, and its potential to enable major competitive differentiation separating the leaders from the slow movers.
Taking AI deeper into business strategy
The competitive advantages that AI brings to wealth and asset management processes are too significant to be ignored, and should encourage asset managers to explore a wider spectrum of applications. Be it single investment instrument analysis or asset diversification, market trends predictions for specific asset classes, risk profiling and management, sentiment analysis, anomaly detection, lead identification, vetting of prospective clients and more, AI and generative AI can instill new capabilities that go beyond augmented processes or intelligence for financial advisors. While asset managers have enormous piles of data available, the effectiveness of their decisions is hugely dependent on the quality, accuracy, and timeliness of the insights that can be gleaned from these diverse sources. Using AI-based tools can strengthen decision-making across the investment process because it equips asset managers with rapid and timely insights, real-time monitoring and sharper forecasting capabilities that incorporate both market insights and client sentiment. Intuitive natural language interfaces can be leveraged to present investment options and strategies backed by sound research and analyses, and facilitate better investment decisions. The computational and analytical powers of AI/ML and generative AI combined with human intuition make for a potent force that can play an important role in alpha generation and catapult asset management into the future. This heady combination can provide data analyses, identification of patterns, market simulations, actionable insights of unprecedented volume, quality, accuracy, and frequency. Not surprisingly, the market for generative AI in asset management is slated to reach USD 1,701 million by 2032, at 19% CAGR over a ten-year period.
Generating additional alpha using AI
Advisors are constantly looking to outperform the market but alpha has become more and more elusive in recent times — using AI can be a game-changer here because it helps anticipate market conditions and adapt trading strategies with greater precision and confidence.AI’s role in generating alpha does not stop with precision forecasting but continues into the portfolio management and allocation aspects of asset management. While traditionally, investment decisions and strategies have an element of subjectivity due to human involvement, AI strengthens this through a meticulous, data-driven approach. Take portfolio construction, management, and optimization for instance. AI-based tools have unmatched data analytical powers that can cut through vast pools of diverse data and weigh in on all kinds of market factors, to set up portfolios that can be proactively adapted and optimized to dynamic market conditions. This kind of data-driven and actionable insights to build investment strategies with time efficiencies were impossible earlier. By reducing over-reliance on limited human expertise and traditional approaches for portfolio management, using AI allows the asset manager to stay focused and keep connected with their clients’ goals, risk appetites, and preferences, that also change as their lives progress. Today, individual investors as well as corporates expect asset managers to employ modern technologies such as AI and ML to design and manage their portfolios with a real-time understanding of market insights, but they don’t want personal interactions to be replaced by technology. Asset managers are under pressure to not only offer great products but also center their offerings on the client. Scalability can present challenges in their personalization objectives especially for those with large client bases. With the advent of generative AI and increasing digital engagements, personalization at scale will become a reality — it can deepen the interactions that sales reps have with clients and help them draw out more relevant inferences and actions from responses and behavior observed on multiple channels and platforms.
DPA’s role in driving additional alpha using AI
It’s undeniable that additional alpha can become a reality with opportunities unlocked by the right AI strategy. For asset managers and asset management firms that are on the path to explore and adopt AI and Gen AI, the main question is then how to wade through oceans of data to mitigate risky investment decisions and enable alpha generation. Generative AI tools not only tap into historical data and past performance but also generate insights and predictive analytics — these were beyond the scope of traditional analytical methods. Decimal Point Analytics plays a pivotal role in driving additional alpha for its clients through its innovative use of artificial intelligence. By leveraging advanced AI techniques, we have developed cutting-edge models that provide deeper insights into market trends, risk assessment, and investment opportunities. These AI-driven analytics enable clients to make more informed and precise investment decisions, optimizing their portfolios for higher returns. Using a partner such as DPA will mean that asset management firms can take advantage of our expertise and solutions in this fast evolving area of AI to set up for alpha generation in the long term.To learn more about how Decimal Point Analytics can enhance your investment strategy and drive alpha, reach out to us today.
