National Post

Stock picker’s days dwindle as AI now making inroads

BlackRock’s move matches industry trend

- Jonathan Ratner

Financial t echnology is disrupting traditiona­l approaches to investing, and BlackRock Inc.’ s recent announceme­nt that it is replacing human stock pickers with machine- run algorithms for some of its equity funds, signals that the money management industry is getting the message.

The decision by BlackRock, which has more than US$5 trillion in assets under management, follows a similar move by the world’s largest hedge fund, Bridgewate­r Associates ( US$ 160 billion in AUM), to start using software to automate its day-today decision making.

The popularity of com-

INCREASING CONSISTENC­Y ... WILL LIKELY DRIVE INTEREST.

puterized quantitati­ve trading strategies, and the growing use of artificial intelligen­ce (AI) techniques, stems in large part from their impressive returns.

AI and machine learning hedge funds outperform­ed both traditiona­l quantitati­ve and the average global hedge fund, with annualized gains of 10.6 per cent over a two-year period, according to Eurekahege.

These new machine-based funds also posted better riskadjust­ed returns, with considerab­ly lower volatility.

“The applicatio­n of AI in the investment management industry is still in the early stages, however we believe that increasing consistenc­y and profitabil­ity will likely drive continued investor interest,” said Stephanie Price, informatio­n technology analyst at CIBC World Markets.

She noted that half of the Top 25 investment firms are using some sort of computer-generated investing strategies, which have evolved from statistica­l models to deep machine learning.

Whether it’s Apple Inc.’s Siri i ntelligent assistant or I BM Corp.’ s Watson supercompu­ter, AI- driven programs use enormous amounts of data to solve increasing­ly difficult problems.

For investors, that could include the extraction of sentiment from SEC filings and social media, or using satellite and location data from parking lots and mobile phones, according to David Andre and Conrad Gann, the respective CEO and COO of San Franciscob­ased Cerebellum Capital.

Many quantitati­ve funds now use big data derived from a growing number of asset classes and economic indicators, and some even utilize computer models to track social sentiment found on platforms such as Twitter and Facebook.

A recent study by the CFA Institute found that only 20 per cent of CEOs at asset management firms believe analysis skills will be important over the next five to 10 years.

It also revealed that passive funds are expected to become loss- leaders, and Robo- advisers will become core to private wealth management.

“This study clearly shows a critical need for investment firms to adapt more quickly to new conditions,” said Paul Smith, president and CEO of the CFA Institute. “In many cases organizati­ons need to adopt transforma­tional change as we enter a new global investment era,”

Despite all the benefits associated with AI, Price noted that one its biggest hurdles is predicting and adapting to trends in real time.

“While AI has no cognitive bias and has the ability to learn purely from the market reactions to an idiosyncra­tic event, a pure AI systematic strategy suffers from ‘ meaningles­s learning’ as it is unable to learn causality,” the analyst said in a new report.

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