Can AI help retail investors make smarter decisions?

There's value in looking for alpha, but in today's complicated and data-driven market, investors might do better to bet on AI.
23 August 2018

Is data your biggest competitive advantage? Source: Shutterstock

New York, Chicago, and London are some of the world’s top financial centers, and they provide billions of dollars worth of services to trillions of dollars of private wealth every day.

Ultra high net-worth individuals from across the world flock to wealth advisors and fund houses in the US and the UK to invest in niche vehicles with complex strategies — all in search of ‘alpha’ — a return higher than the market benchmark.

Up until now, generating alpha was the sole domain of gifted fund managers who used a mix of knowledge, experience, and their own brand of eccentricity. They made several bets, some of them panned out, some didn’t, but the good ones managed to create oversized returns for investors from the overall portfolio.

In today’s day and age, however, AI can beat fund managers hands down. All because it has access to a phenomenal amount of data, and possesses the power to process that data in ‘real-time’.

In fact, according to a new study by the World Economic Forum, AI can be used to generate products with new return profiles that are uncorrelated with established strategies.

Understanding the data opportunity

The existing geopolitical circumstances make many market correlations non-linear and convoluted, and therefore, difficult to analyze. As a result, traditional analysis techniques fail to find relevant insights into the future.

The truth is, it is getting increasingly difficult to generate alpha through traditional investment strategies in most markets across the globe. Sophisticated investment approaches too, are making markets increasingly efficient.

AI. however, can create new opportunities for financial services firms if it is used to support and augment fund managers. As a technology, it’s core functionality is to find, capture, and make sense of data.

Living in a data-driven world, AI is perfectly suited to discover new data sets, crunch greate volumes of data, and make useful correlations that help find new arbitrage opportunities and create exciting investment strategies.

According to the WEF’s report, AI is able to help use data to generate alpha and differentiated returns by:

# 1 | Automating the collection and structuring of data to support efficient investment decisionmaking

# 2 | Employing a modern data storage architecture to make large datasets accessible

# 3 | Parsing unstructured data using advanced-learning algorithms to continuously and economically build new datasets that can support investment analysis

# 4 | Developing general-purpose analysis technologies that can derive insights from a wide variety of types of data

# 5 | Using cutting-edge algorithms to identify previously unexplored patterns and correlations that support investment decision-making to generate alpha for investors