Searching for those AI use cases in asset management
What hedge funds and Bloomberg are finding out
The award for best opening line this week goes to the Alternative Investment Management Association, which launched a report on how hedge funds are using AI, and began it like so:
"The very mention of the term AI sparks excitement and anxiety in equal measure".
Anxiety indeed. For most people, the excitement over AI seemed to come out of nowhere. One minute it was business as usual; then ChatGPT gets released, and folks are talking as if electricity had just been invented.
On the whole, the investment management industry has so far embraced the wait-and-see approach. After all, crypto was pretty loud for a while. And there you go: we waited it out, and NFTs just went away all by themselves. Maybe AI is like that too.
The trouble with AI is, it’s a vanishing act. When it works, it becomes invisible. It’s the well-timed coupon, the handy spellchecker, the auto-generated captions, the fun Spotify playlist. Little bits of usefulness, that one day are simply there. This is why some people love to say: ‘AI is anything that doesn’t work yet’.
What will those little bits of usefulness be for asset management? And specifically for marketing, what’s out there that can help create more value?
Along with the AIMA report, a couple of other surveys got published very recently. Together, they paint a picture of where financial services industry is at with the Rubik’s cube that is AI adoption. This week, let's dig into the data, and see who’s learnt something useful to pass along to the rest of us.
Let's start with those hedge funds. The report is based on a survey of 157 hedge fund managers around the world, and 86% of them permit their staff to use some form of Gen AI tools to support their work.
When it comes to use cases, it was all "enhance marketing materials, support their coding efforts, and (use) for general research purposes". Here again is that problem of specificity: hedge funds realise there's something deeply useful about it, but can’t exactly pinpoint what it is.
Now contrast that with Bloomberg. Just in time for earnings season, Bloomberg gave terminal users a new little tool, that provides instant summaries and analysis of company performance. Unlike other AI tools, Bloomberg's summaries are laser-focused on the information analysts need.
As reported by Institutional Investor, the summaries include context on a company’s guidance, capital allocation, hiring and labor plans, the macro environment, new products, supply chain issues, and consumer demand.
“It’s been an iteration to the point where we got comfortable that this makes a difference, this is unique, this is differentiated,” said Andrew Skala, who spent nearly 10 years as a sell-side researcher (highlight mine) before joining Bloomberg.”
So one lesson is, AI is best used when someone has a solid understanding of what a good end-result looks like. Bloomberg started with a hypothesis of what creates value to clients, and set about using technology to create that value.
The second lesson is to do with playfulness:
Nvidia also recently published a survey of how financial services companies were using AI. You'll be glad to hear that no less than 75% of survey respondents considered their company’s AI capabilities to be industry leading or middle of the pack.
More usefully, though, 37% of respondents showed interest in report generation, synthesis and investment research to cut down on repetitive manual work. And 55% said they were actively seeking generative AI workflows for their companies.
That 'actively seeking' matters. Having a deep understanding of one's current process is one thing, but the other is simply experimenting with AI to see how a corresponding, more efficient process can be built.
But how does one go about 'actively seeking'? Well, the UK government just announced this week it plans to spend £100 million on building AI hubs and part of it is training regulators. Training was also a big deal for the hedge funds, and the AIMA survey found half of larger hedge fund managers plan to offer training within the next six months.
And the training brings us back full circle back to the anxiety:
"Experimenting" sounds easy and risk-free, but that is never the case with technology. The barrier lies in the mental load of the unknowns: Where do I go? What do I do? What if it doesn't work? How will I know it worked? Is it just a waste of time?
When these questions and others are left unanswered, the easiest thing for employees to do is shrug and say: 'Maybe later'. Which means that any company serious about using AI, must look for training beyond the specifics of tools. After all, these are bound to evolve.
To make use of AI, companies will need more structured playtime.
Treasure Corner: Brand perception for financial advisors
Investors who work with financial advisors aren’t all that excited about investing, according to a new study by FAIR Canada published this week. Advised clients said they prefer to delegate the complexities of investing, while focusing on other aspects of life, like work, kids and hobbies.
Another finding was that most respondents had strong levels of trust in their advisors. They generally believe that their advisor acts in their best interests.
Now imagine you’re the financial adviser. Your clients trust you completely, as they get on with their lives. How does it feel to be on the receiving end of so much trust?
As an IFA, how does it impact the purchase of investment products on behalf of clients?
A piece of research from 2020 titled Independent Financial Adviser (IFA)-based brand equity pyramid (by Nathalia C. Tjandra, John Ensor, Maktoba Omar & John R. Thomson) usefully links the responsibility IFAs feel towards their clients to how they choose brands.
According to interviews with IFAs from nine UK companies, two factors all interviewees agreed were important were:
1. Commitment and longevity. Knowing the providers’ level of commitment to the market was important. All IFAs highlighted that a provider’s longevity was also a sign of the provider’s security and stability.
“Because all the time somebody comes into a particular market and then leaves it”.
2. Past experiences with the brand. All IFAs pointed out that they would hesitate to choose providers who have mishandled their business in the past.
“You want to have a security. You don’t want to have a conversation with clients and say you see that investment that I recommended to you I thought it was really good but it turned out not. You don’t want ever again to have that conversation.”
And the brand perception mattered to how IFAs responded to marketing:
All participants stated that they received many invitations from various providers to get involved in their engagement activities. But they were only willing to spend their time, effort and energy in the activities if they had a strong relationship with the providers.
Also Happening
It’s been another rough week for environmental funds, with the European Securities and Market Authority (ESMA) coming out against "impact washing". Its research found funds that claim to contribute towards the United Nation’s Sustainable Development Goals (SDGs) “do not significantly differ” in their contribution to the targets versus their non-SDG or ESG peers.
Which types of AI training should investment managers seek? FinText has been providing genAI training to companies since the early days of the technology. Clearly, the market need for training is vast. So we’ve written about what we believe are important learnings any training on the subject should include.
Natixis surveyed 500 fund selectors on their outlook on everything. Active management seems to be doing well, with 58% of respondents reporting that their active funds outperformed passive funds in 2023 and 68% of saying markets now favour active managers.
When asked about AI, more than half (51%) said they have begun using AI to aid in their analysis, and almost three-quarters (73%) believe AI will help them unlock opportunities that were not clearly visible before. Just like we said: once it becomes visible, it will no longer be AI. It’ll just be that extra bit of usefulness.