Invest Tech: AI Impact

With talk about AI replacing human functions, I thought to take a moment to review the potential parts of the investment management workflow where automation and AI could benefit portfolio managers, traders, and risk managers, while also considering where human persistence remains indispensable.

Data Collection

- AI Possibility: AI can automate the process of gathering data from multiple sources at scale, including real-time market data, social media sentiment, and global news feeds, making it quicker and less error-prone.

- Human Persistence: Human judgment remains essential for contextualizing data, discerning the relevance of emerging trends, and interpreting ambiguous or contradictory information from various sources. Relying solely on automated algorithms without human oversight can be hazardous due to the potential for misinterpretation or missing nuanced insights.

Portfolio Construction

- AI Possibility: Machine learning models can analyze vast datasets to suggest portfolio compositions that balance risk and return, adapting quickly to new data like capital inflows and outflows.

- Human Persistence: Human insight is crucial for understanding nuanced aspects like an investor's risk tolerance, ethical considerations, and personal financial goals, which are key to tailoring effective investment strategies. Portfolio managers blend tried-and-true methods with their unique methodologies to construct portfolios. The strategy might be driven by time (e.g., periodic rebalancing) or by events (e.g., market changes or life events), requiring a human touch to adapt and personalize approaches.

Portfolio Analysis

- AI Possibility: AI can perform complex statistical analyses, identifying patterns in performance data that might predict future outcomes, offering insights beyond traditional analysis.

- Human Persistence: While AI excels at handling rule-based workflows, interpreting analyses in the context of broader economic, geopolitical, activist-focused, or sector-specific developments still greatly benefits from human expertise and intuition.

Position Adjustment

- AI Possibility: AI algorithms can react to market moves by suggesting or executing trades based on pre-set rules or learning from past performance. Previous implementations of strategies with selected tweaks may reveal effective patterns.

- Human Persistence: Human judgment is crucial for decisions involving major strategic shifts, understanding market sentiment, or evaluating the impact of unexpected global events. Additionally, meetings with investors can influence tactical changes in investment focus, necessitating a human presence for nuanced discussions and adjustments.

Portfolio Rebalancing

- AI Possibility: AI can automate rebalancing by monitoring the drift in asset allocations and executing trades to maintain the desired risk profile or investment strategy. It can identify optimal times for rebalancing based on market conditions, transaction costs, and tax implications.

- Human Persistence: Human oversight remains essential for deciding when to deviate from automatic rebalancing due to unique market conditions, client-specific events, or when anticipating significant market shifts. Moreover, human advisors excel in understanding the psychological impact of rebalancing on clients and integrating it into the broader context of long-term financial planning.

Order Handling

- AI Possibility: Automation can execute orders with precision, optimizing for timing, price, and size, particularly in high-frequency trading scenarios. AI can also adapt to learned patterns of portfolio managers, adjusting orders in response to specific market conditions or events. By leveraging the accumulated experience of expert order handlers, AI can execute trades or suggest modifications to enhance efficiency and effectiveness.

- Human Persistence: Human negotiation skills are indispensable for managing complex or large orders, particularly in over-the-counter (OTC) markets or during volatile market conditions. However, for the majority of order workflows involving regularly traded assets, standard order types, and established routes, AI can potentially offer superior execution through intelligent management.

Risk Management

- AI Possibility: AI can continuously monitor risk factors, running simulations to predict how different scenarios might affect the portfolio. The advantage here is the speed of analysis, which allows for a broader consideration of both outliers and correlations.

- Human Persistence: However, interpreting these scenarios, especially in the face of unprecedented or unique market conditions, still necessitates human oversight to ensure alignment with strategic risk management policies. AI struggles to understand human intent, and the interpretation of nuanced human activities often requires human judgment.

Portfolio Compliance

- AI Possibility: AI systems can automatically verify trades against portfolio rules to ensure compliance in real-time. Additionally, AI could propose compliance modifications by anticipating conflicts with investors' known intentions.

- Human Persistence: However, understanding the nuanced intent behind investor goals or navigating through grey areas in compliance mandates the expertise of human compliance officers. These professionals, when augmented with AI insights, can enhance their visibility and effectiveness in identifying and addressing potential breaches.

Asset Allocation

- AI Possibility: AI can model and suggest dynamic asset allocations using market predictions and historical data analysis. It could also set long-term goals based on a firm's traditional or selected interpretations of its data.

- Human Persistence: However, human advisors play a critical role in aligning these AI suggestions with clients' life changes, long-term financial plans, or ethical investing principles. Although the allocation process might follow defined strategies, exceptions often arise that require the portfolio manager's vigilant oversight.

Investor Reporting

- AI Possibility: Automation can produce reports filled with current, personalized performance data, customized charts, and predictive analytics. Firms can leverage AI to craft a narrative that helps investors better comprehend the asset manager's strategy.

- Human Persistence: Yet, personalized communication, simplifying complex financial strategies, and addressing investor concerns about specific investments still heavily rely on human advisors. While AI significantly improves interactive communication, it's the human touch that frames the data into a narrative investors can relate to.

By integrating AI where it excels and valuing human insight, investment firms can achieve a synergy that boosts workflow efficiency, ensures portfolio compliance, and increases investor satisfaction, all while preserving the nuanced judgment only humans can provide.