Practical analysis for investment professionals
29 March 2018

Artificial Intelligence and the Future of Investment Management

This is the final installment of a three-part series exploring the impact of artificial intelligence (AI) on investment management. I want to thank the speakers at the AI and the Future of Financial Services Forum, hosted by CFA Institute and CFA Society Beijing, for inspiring this series. The initial articles offered a primer on the AI technologies that are relevant to investment professionals and explored the potential threat AI posed to human portfolio managers.

Not all is lost, investment professionals.

Despite artificial intelligence (AI)’s significant and rapidly increasing “brain” power, the investment management business is not going away tomorrow.

But it is changing and the current model will one day be rendered obsolete. So what does the road map leading to that eventuality look like? And what’s our best strategy in the interim?

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Technological Boundaries

Contrary to conventional wisdom, the data scientists on the panel at the AI and the Future of Financial Services Forum in Beijing in December collectively reassured the investment managers in attendance that AI will not drive them out of business overnight. Why? Because in the words of Eric Chang of Microsoft Research Asia, “There is not yet enough data.”

Shu Ming of Lingfeng Capital cited the statistical concept of V-C dimension, which measures the number of rules within a system, to provide some perspective.

Given the biological limits of the human brain, researchers believe that the threshold for an intelligent system to beat human beings at a goal, say playing the ancient board game of Go, is about 10-million rules.

To put all this in a layperson’s language: It takes time and effort to write the code and tag the data for the machines to process.

How much time? In the ImageNet image recognition competition, 50,000 people from 167 countries took more than three years to organize and label over 100-million pictures. And investment management may be a more nuanced subject matter than image recognition.

Moreover, although finance is a data-rich industry, financial markets are not controlled environments and encounter many unanticipated events that AI is not particularly well-suited to navigating.

“[Warren] Buffett can make split-second decisions on complicated M&A deals,” Chang said. “AI cannot do that yet.”

Neko Chen, the former CTO of Goldman Sachs China, agreed, pointing to instances of market flash crashes and the inability of machines to respond in a timely fashion.

Another practical challenge AI programs face is that they cannot explain themselves. By definition, a deep learning model is a black box. Quants are often blamed when their black boxes misfire, but not because they don’t know what’s in them. They just choose not to share their trade secrets. Data scientists, on the other hand, may really not know what’s in their black boxes.

AI Pioneers in Investment Management

Human Hope

A critical point to remember: This is not a race between humans and machines. As Chang put it: The AI plus human intelligence (HI) model holds the most promise. Our competition is not machines. It is the other people plus machine teams out there. We want the smartest machines working for us and our best chance of building them faster is to work with the best in AI.

This supports our May 2016 hypothesis that the optimal way forward for fintech is likely through the collaboration of powerful financial institutions and powerful technology innovators.

So what can investment professionals today take from all this? We will all yield to AI gradually over an extended period of time. In that process, investors will enjoy the benefit of AI-powered “assisted investing,” much like drivers today enjoy “assisted driving” en route to the moment when self-driving cars rule the roads.

What’s the road map for AI in investment management? This may be an oversimplification, but I believe (1) portfolio managers will have longer careers than analysts, and (2) investors in liquid markets will enjoy the benefits of AI sooner.

“AI’s advantage is in standardized and repetitive tasks,” Shu pointed out. In the near future, analysts will likely free themselves from such mundane chores as building basic financial models. Insights, rather than Excel skills, will rule the day.

It will be an iterative process: Analysts will help build intelligent systems to process more information to help analysts generate insights. Analysts will continue to fine-tune the system until it becomes the Siri that can answer all our questions.

The role of a portfolio manager involves more “dimensions,” however. Portfolio managers tend to cover more sectors or countries than analysts and make their decisions after considering a variety of “rules” that will take longer to code. Less liquid markets, such as convertible bonds or frontier markets, generally have less data with which to train the neural network models. In other words, our jobs are more secure if we work in the less efficient segments of the market.

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But whatever our roles, nobody can afford to be complacent.

“Your destiny is in your hands,” Li Hongyu of ZhongAn Technology told the audience. The panelists all agreed. “Continuing professional development is a must even without AI.”

And obviously, the more we improve our investment skills, the harder it will be and the longer it will take for machines to catch us.

May the best team win!

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/ktsimage

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About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, senior director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, Multi-Asset Strategies: The Future of Investment Management and AI Pioneers in Investment management. He is also a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

4 thoughts on “Artificial Intelligence and the Future of Investment Management”

  1. Norbert says:

    Hi Larry

    Wow, what an inspirational article!

    I am not an expert but I have always been IT minded and I am interested in AI very much. Thus, I asked myself, how will the financial market evolve with the influence of more and more AI?

    I also think, that your conclusions to better collaborate with such machines is the best way to cope with this new technology as with any before. You bet that AI arrived here to stay and creep into every corner of our world. It is the next big step of our development materializing.

    If Moores law holds for another 20-30 years, the feared “Technological Singularity” may be a threat. But I think not so. Because due to competition, increasing as ever before, we will probably merge with machines pretty soon to become the long expected cyborgs with much better hybrid mental and physical abilities. Then, I expect these beings themselves and many other systems to merge more and more in our increasingly connected world, maybe leading to “The Swarm” super organism. Globalization, social media, I4.0, IoT, connected everything… are further current trends all pointing into the same direction.

    Coming back to our corner of the world, the global financial market may then evolve into “just” one internal system function within the emergent swarm super organism. This can be compared to one of many systems within our present body, e.g. circular, digestive, nervous, respiratory… , which, by the way, all emerged also from the merging of various lower beings from different origins, symbiotically collaborating more and more…

    Wishing you good collaboration

  2. Philip Barton says:

    Excellent review, Larry. I’d be interested in your thoughts on MOV37.

    All the Best,
    Pip Barton (#11415)

  3. Lloyd L. Clucas says:

    Good stuff, Mr. Cao. Relevant and clear. And about the future!

    Better than I have come to expect from my beloved professional association. Unfortunately.

    The CE program is a joke — as this old warrior noted in arguments long ago against making such nonsense mandatory. Fortunately the old warriors won on that one. Markets sort out who is competent and who isn’t. That is what they are for — not a job for bureaucrats. Maybe for doctor sorts, but not for those measured in their results every single day.

    One learns every day or one perishes. I do. But it has nothing to do with what bureaucrats think, or say, is important. They haven’t a clue about the future. Most of us don’t. But it doesn’t involve trying to drive solely with the rear-view mirror or spending much time with academics.

    I still recall from the 1990s writing to the AIMR. The ASEA had just been formed. I thought the AIMR (terrible name back then) should at least just send a note of encouragement to them. While in Kenya and Ghana I had been approached by eager youngsters wanting to get a CFA designation. They spotted my lapel pin from across rooms. I sent many books.

    The nitwit at the AIMR then asked me, “Please send me a memo about what that would do for the AIMR.” I lost it. Today, of course, CFA Institute officials circle the globe encouraging such activities. Where is the foresight?

    And that is my point about your addressing the future in your three articles and the CFA Institute not doing so in the not-so-distant past, nor in its CE at present.

    Best wishes.

    Lloyd L. Clucas, JD CFA [# 6690]

  4. Syeda Afshan Gillani says:

    Wonderful article. I am a phd scholar in Pakistan. I was planning for my phd research topic.please suggest what can be the research topic that include artificial intelligence and investment management.please guide

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