AI is changing the face of investing (for the better?)

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From unlocking your cellphone using the face ID feature and calling on your Apple product’s Siri function (or is Alexa your preferred digital voice assistant?) to navigate a task, to relying on map apps for the best route and getting online shopping and/or Netflix recommendations of what you may like – AI is more a part of your everyday life than you may have realised. That’s because our world is fast moving in the direction of machines mimicking to precision the activities that were once assumed to be solely the ability, function and even remit of humans, even to the point of investing and managing your money. (You read that right). So much so that an increasing number of hedge funds and individual investors are turning to AI and machine learning to boost their portfolios and develop trading strategies, signalling that change is afoot in the world of wealth management – but is it for the better?

AI: The help we need?

Global consulting firm McKinsey explains AI as “a machine’s ability to perform the cognitive functions we associate with human minds, such as perceiving, reasoning, learning, interacting with an environment, problem solving and even exercising creativity”. 2022 was a bumper year for AI as generative-AI tool ChatGPT dominated headlines around the world, but many of us have actually been using AI for a while.

AI enables computers and machines to make sense of data the scale of which far exceeds what humans can typically analyse. For this reason, some perceive it to negate the value of human intelligence. There are long-held concerns that AI will leave millions of workers redundant and without employment, and red flags have been raised around the ethics that (should) encase its use (Elon Musk and Others Call for Pause on A.I., Citing ‘Profound Risks to Society’) – but many things can be true at the same time, meaning it’s possible to also view AI as a tool that enhances said human intelligence.

That’s because AI is undeniably fast and accurate, “finding patterns and discovering relationships in data that a human may miss,” according to Google Cloud. It also reduces mistakes associated with human error by utilising the same process consistently, leaving no room for missteps, and it can do away with repetitive, time-consuming tasks, “freeing human capital to work on higher impact problems”. It’s hard to imagine any investor not delighting at this prospect when it comes to the individual(s) managing their money.

The current context

According to BarclayHedge’s Hedge Fund Sentiment Survey (2018), 56% of hedge fund respondents reported using AI to help them make investment decisions, with about 66% of them using AI to develop trading ideas and improve their portfolios. AI is particularly helpful in analysing data and forecasting market movements to enable the most tactical asset allocation. More recently, the authors of Implications of AI-based robo-advisory for private banking investment advisory* found that AI systems enable seamless client journeys, increase advisor flexibility, support the client-advisor relationship by applying an omnichannel approach, and demand advisor skills to be augmented with technical and statistical knowledge.

It’s not surprising, then, that BNY Mellon reports that a class of AI pure play hedge funds has emerged in recent years that are based entirely on machine learning and AI algorithms, citing Aidiyia Holdings, Cerebellum Capital, Taaffeite Capital Management and Numerai as examples. From a business operations perspective, several hedge funds now rely on AI for calculating payouts, cost models and recruitment activity as well as to optimise middle and back office operations.

We’ve also seen the rise of robo-advisors in recent years, referring to “the systems that use algorithms to automatically perform investment decisions or tasks which are mostly done by human advisors”. Robo-advisors are able to deliver through a website or an app customised offerings at a fraction of the cost of consulting a qualified human professional. They’re especially suitable for investors who prefer a hands-off approach to investing; however, many robo-advisor platforms provide some level of contact with a real-life financial advisor, thus appealing to those who are not ready to rely entirely on tech to manage their money. There’s also a considerable amount of automation that comes with using a robo-advisor so that your portfolio is regularly rebalanced to reflect fast-evolving market events.

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Offerings in the robo-advisor space are being developed at great speed, enabling investors to pick the product (and provider) that really suits their needs best. Whether you prefer high support but have a low initial investment amount, want to pay minimal fees but still enjoy an easy online experience, or have a hefty sum to open your investment and want highly personalised advice, the options are many – especially if you’re based in the Global North. The local scene is gaining ground, however, with the Financial Services Conduct Authority having published fit and proper requirements for robo-advisors, so expect to see SA’s fintech scene catching up soon.

There’s also a growing number of AI-focused exchange-traded funds (ETFs) that investors can consider for a stake in automation and robotics companies at the forefront of this industry’s growth, as roughly 30 AI ETFs trade on US markets (with total assets under management of $6.47 billion). With $1.75 billion in assets, Global X Robotics & Artificial Intelligence ETF (BOTZ) is the largest.

Where to next?

With Musk and about 1 000 other tech leaders (excluding Microsoft CEO Satya Nadella, who led the tech giant’s $13 billion investment into OpenAI, the lab behind ChatGPT) calling on AI labs to pause development of the most advanced systems, out of concern for the “profound risks to society and humanity” that AI poses, it’s hard to say where exactly things are headed with this technology.

Having said that, there’s no doubt that businesses across the globe will be looking at how to use AI, at the very least, to provide enhanced customer experiences and deliver improved results on investments – which would already be a welcome change for the better.

This post was sponsored by Shyft, the global money app, powered by Standard Bank. With Shyft you can buy forex instantly anytime, anywhere, and at the cheapest rates, and invest in top US stocks and ETFs. Shyft was named Best Financial Solution at the 2021 MTN Business App of the Year Awards. Visit Shyft to download it now, no matter where you bank. Shyft operates under the license of The Standard Bank of South Africa Limited, an authorised Financial Services Provider (FSP number 11287).