Money managers weigh benefits of artificial intelligence

A majority of asset managers are now using artificial intelligence in some form, according to Mercer.

Asset managers are increasingly embracing AI, with nine in 10 now using the technology in their investment processes or planning to in the future.

A majority of money managers are now using artificial intelligence in some form, but fewer than half expect the technology to have a net positive impact on market returns in the medium term, according to a new report.

Long used by quant funds to try to gain an edge, the explosion of AI into the mainstream has seen widespread adoption across the investment industry, with nine in 10 asset managers now either using the technology or planning to in the future, Mercer’s latest global manager survey has found.

But AI processes are still reliant on human intervention, with the technology largely used as a supportive “tool” more than anything else.

Of those that currently use AI, two-thirds see the technology driving an increase in their product range in the next three years, but only 42 per cent expect to see a benefit in terms of net market returns over the same time, the survey reported.

Indeed, large-scale use of the technology could have an impact on the ability to generate alpha, or excess returns, Mercer’s global strategic investment research director, Nick White, suggested.

“That nine in 10 managers are already using AI — or are planning to — as part of their investment and research process corroborates the thesis that managers are actively seeking an edge from AI,” Sydney-based Mr White said.

“Of course, managers may not see an alpha return on their investment in AI if everyone is using the same AI techniques. Any new-found anomalies may quickly disappear, as alpha is a zero-sum game, and everyone is spending.”

For a majority, enhanced data gathering and analysis is at the forefront of managers’ use of AI in pursuit of alpha generation, though a smaller minority of managers are deploying AI in relation to complex aspects of portfolio management.

AI has the potential to play a more significant role in attribution and risk management, Mercer’s global chief investment officer Hooman Kaveh said.

But both generative and predictive AI require more learning and testing to ensure investment outcomes are superior to those delivered by human-driven inputs, he cautioned.

Among those already using the technology, data quality and availability was the most-cited barrier to unlocking its full potential. Other concerns included integration and compatibility, as well as ethical and legal considerations.

At the asset-class level, the biggest opportunities for AI-driven value creation are in equities, hedge funds, fixed income and digital assets. But it may have limited value-creation potential in illiquid markets, including in real estate, Mercer found.

Quantitative-based hedge funds have a 20-year head start on the rest of the industry, with this cohort well experienced in using technology to gain a competitive advantage. But even within this segment, managers are at different points along the AI-integration curve, Mercer head of hedge fund research, John Jackson, said.

“For fundamental strategies, it is still early days for many in terms of AI implementation across the investment process,” he said.

“Many fundamental managers are still testing AI applications for different processes and functions across both the front and back-office operations with most focused on efficiency and productivity gains.”

At a macro level, asset managers expect AI to deliver positive economic benefits, and more than half — 56 per cent — see AI contributing to disinflationary forces in the economy through productivity, automation and competition impacts, driven by more widespread integration.