Early moving buy-side firms can gain efficiencies and seize a competitive advantage.
For a long time, artificial intelligence has been mostly a ‘tomorrow’ story for asset managers – interesting enough to consider implementing as a future technology, but not especially practical for present purposes.
The industry is breaking out of that holding pattern.
“AI has largely moved from a set of technologies in search of problems to solve, to a maturing set of technology tools that can offer specific benefits to end users on the buy side,” said David Csiki, Managing Director and President at INDATA.
The change is coming from the top down. While AI itself dates back to the 1950s, so far 2023 has been among AI’s buzziest years, with generative AI applications such as ChatGPT entering the discourse of the general public, along with advances in Natural Language Processing (NLP). Specifically, Microsoft’s rollout of ChatGPT in its widely used Office 365 business software is an example of tangible AI utility for investment management firms.
“Recent developments have created significant momentum in AI,” Csiki said. “This is sure to find its way into the specific systems and processes that are widely used on the buy side.”
Generative AI – that which creates new content – has created the most buzz in the technology space since Apple’s introduction of the iPhone in 2007. That’s the opinion of BlackRock Portfolio Manager Reid Menge.
The amount of compute used to train generative AI models is doubling every three months, and the utility of the technology for corporations across industries is “endless,” according to Menge. “ChatGPT is nearly as smart as the human brain today,” Menge said in a February 2023 research note. “With the computational horsepower being used to train these AI models, imagine the capabilities of these generative AI services by 2025.”
Csiki noted the current inflection point for AI on the buy side comes down to investment and wealth-management firms moving from indirect usage of AI – for example, via broker-provided trading algorithms and embedded into third-party order management systems (OMS) and execution management systems (EMS) – to an in-house suite of capabilities.
“The future of AI’s use on the buy side promises to be much more direct,” Csiki said. “Traders and portfolio managers will utilize AI-based tools within their OMS and portfolio management systems with more hands-on control over specific workflows and processes that are unique to their own firms, all with the goal of increasing productivity.”
In a 2019 report, Deloitte highlighted a quartet of areas in which investment managers can benefit from AI: generating alpha, enhancing operational efficiency, improving product and content distribution, and risk management. Artificial intelligence can enable firms to potentially transform traditional cost centers into AI-enabled “as a service” offerings, as well as help investment advisors improve customer experience by generating more insights, customizing content more effectively, and delivering it with greater agility and speed.
“When these four pillars are augmented with AI, investment management firms can rapidly transform business models, operations, and internal capabilities,” the Deloitte report stated. “However, to fully benefit from AI, firms will need to carefully consider and manage the intersection between technology and talent.”
For a buy-side firm looking to adopt or expand AI, Csiki said the optimal first step is to look to industry providers who already have AI integrated into their systems and are far enough along to offer practical use cases. Focus on practicality and steer clear from conceptual “pipe dream”-type scenarios, which may promise a cost- and risk-free way to select stocks or replace people.
As investment management is a business driven by and for humans, AI will never fully supplant traders, portfolio managers, technologists, and other mission-critical professionals. But the ascent of AI into a must-have technology and efficiency generator is seemingly inevitable.
Said Csiki: “Much like the cloud and data analytics, AI-based tools will become ubiquitous on the buy side, and early adopters will have a competitive advantage.”
Read INDATA’s recently published thought leadership on this topic:
Future Proofing the Front Office: AI
