The consensus view is that AI is disrupting asset management. Angelo Calvello takes the contrarian view: it will be years before such disruption occurs.
There’s no doubt that traditional investment methods and tools have failed us (and this failure has adversely affected the lives of millions of pensioners, students, and other beneficiaries). We are in dire need of new, innovative approaches to solving investment problems; AI (including both nontraditional data and the new, powerful computational methods used to extract insights from this data) holds the promise of providing such innovation.
At most, a handful of asset managers—early adopters—genuinely use AI in a consequential manner to create better investment outcomes. Yet almost daily another asset manager proclaims its use of AI in its investment process, while another foretells of its intentions to adopt AI. The former’s claim generally reduces to a repurposing the use of big data, a misappropriation of the term “machine learning,” or simply corporate window dressing. The latter’s plans will go largely unfulfilled because the actionable framework required to adopt AI in a way that generates better investment outcomes (i.e., more consistent returns per unit of risk in various market environments) disrupts the manager’s entire business.
For example, incorporating AI into the investment process requires the firm (especially its leadership) to radically alter their worldview and accept that conventional investment approaches and the supporting academic dogma on which they have built their current business and careers do not fully circumscribe the boundaries of investment possibilities and that AI could produce superhuman results that might not be explained by traditional measures and tropes. It also forces management to transform its existing business model (culture, human resources, compensation, etc.) and management style (successfully integrating AI into the business is a nontrivial task), drastically expand its existing budget knowing the ROI is uncertain, and rebrand itself in a way that demonstrates that this transformation isn’t an act of capitulation.
True adoption requires true disruption, and given that asset managers have a hegemonic market position, earn a 30% profit margin on mediocre to disappointing investment products, and aren’t seeing a wholesale dislocation of their client base, they have little incentive to self-initiate such disruption.
Angelo explains why asset managers will inevitably (but slowly and haltingly) incorporate AI into their investment processes in a meaningful manner. (But expect the hand waving and misdirection to continue unabated.) Angelo argues that this incorporation could be accelerated by the entrance of an external AI-based actor (see his article on Kai Fu Lee) or the success of AI-based investment startups.
Please note that the presentation’s scope is using AI directly to make investment decisions; it does not discuss how AI could improve investment operations, compliance, or other critical but noninvestment processes. Moreover, the presentation’s focus is institutional investment management—the large pools of assets like pension funds, endowments, and sovereign wealth funds managed for the benefit of others. The presentation will not discuss retail applications of AI like roboadvisors, as these are trivial from a technological perspective.
Angelo A. Calvello is cofounder of Rosetta Analytics, a technology startup using proprietary deep learning techniques to create investment signals and scalable investment strategies. He’s also cofounder of Distributed Alpha LLC, a proprietary trading firm that invests in mispriced application-driven, decentralized technologies, cryptocurrencies, and blockchain tokenized assets, and founder of Impact Investment Partners, an investment consulting firm. A serial innovator and author and speaker focusing on artificial intelligence, Angelo’s unique insights into the rise of disruptive technologies and how they are reshaping investment management—new sources of return and new tools to measure and manage risk, realignment of the relationships between asset owners and asset managers, different composition and demographics of the workforce, and transformation of traditional business models—have revealed the future of beneficial investing. Angelo is the “dissident” columnist for Institutional Investor, where he had the most read opinion columns in 2017, and a former columnist for Chief Investment Officer. His column The Doctor Is In won the American Business Media’s 2016 Jesse H. Neal Award for best commentary. He has also published extensively in other publications, including Pensions & Investments, Healthcare Financial Management, and the American Indian Culture and Research Journal (UCLA). He’s the author of Environmental Alpha: Institutional Investors and Climate Change (Wiley 2009), founder and publisher of the Journal of Environmental Investing, and a member of the Chicago Quantitative Alliance. He’s also the chairman of the board of outreach with Lacrosse and Schools, a sports-based nonprofit that creates educational opportunities for at-risk youths on Chicago’s South and West Sides. He has over 25 years of experience in the institutional investment industry and holds a PhD in contemporary European philosophy from DePaul University.
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