How will Artificial Intelligence affect investing and fund managers?
‘What does the near to long term future have in store for financial investments as we know it, Jim? What impact does the captain’s log predict that Artificial Intelligence (AI) will have on this delicate but infinitely important matter?’
‘Well, why don’t we weigh up some of the opinions and observations that have been forthcoming to date, as well as several of our own Spock?’
‘Affirmative, captain.’
Well, as Spock so rightly enquires, what has the future in store for Financial Investments and just as importantly, to some, Fund Managers too regarding AI?
One train of thought is that AI may well become pivotal in Fund Management in the not-too-distant future but not to the complete detriment of Fund Managers (FMs) as some may fear. Indeed, it is viewed they could form a well-balanced double act.
What is envisaged is that FMs will more than likely employ AI in the research process being that it can assemble and collate enormous amounts of information in a fraction of the time of a mere mortal. This in turn will allow the Fund Manager more time to achieve an even more considered decision as to what goes in and comes out of the fund’s portfolio.
All very well, but there are certain roles within Fund Management that may not, and probably will not, work in tandem with AI as well as the managers themselves. The foreseen primary roles being that of the Research Analysts, simply due to the fact that, as previously mentioned, the AI can process multi-volumes of data far speedier than a human and arrive at the same conclusion.
Indeed, the man tagged with the moniker ‘Godfather of AI’ warned of the potential perils and dangers of AI as he resigned from his post at Google, citing that Chatbots could well become more intelligent than humans in the not too distant future. I’m slightly dubious about this as AI can only feed on what humans instil in it, but that’s not to say ‘Skynet’ may never happen…!
A relatively recent paper published by one of the world’s largest listed hedge funds, Man Group, who have circa US$145 billion under management, compared the arrival of ChatGPT to that of Google Search some 20 years prior, suggesting that it will become as vital an analytical tool, assisting FMs to reach improved decisions in much quicker time.
A possible downside to having AI create publishable research though would be that there would be no original insight. All articles would read exactly the same, wouldn’t they? Therefore, with no opposing views, there would be no market! Here again is an argument that humans will not become obsolete!
The most recent development under the AI umbrella is that of ChatGPT, as touched on in the previous paragraph. In reverse order, which will become apparent as to why, the acronym GPT is defined thusly:
T: Transformer Architecture in deep learning which draws out and analyses data.
P: Pre-training. This enables the model to train itself on enormous quantities of data and in turn react in super-quick time to queries.
G: Generative. After the first two processes, AI can create new data in the same vein as to the data it was initially provided with.
But of course, we have seen ‘robots’ involved in financial markets and services for quite some time, such like, algorithmic calculations, ‘Quant strategies’ etc. Hedge funds probably being the primary user of these instruments. But ChatGPT takes things up to a new level. Recently, a website dealing in all things finance, found a fund of 38 stocks selected by ChatGPT, outperformed the UKs 10 most popular funds 90% of the time over a 10-week period.
But wait, what about the fact that the ChatGPT acts on information that is already available, and/or has occurred previously. How, or maybe we should say, can, it make a prediction like a human, or form an opinion for itself without input from mere mortals? I would personally suggest that it could not, but others would say it could. As well as this, what if it interpreted certain news in a completely different way that humans would? Surely it would then make a wrong call, resulting in it acting in the opposite direction than the market is going, thus depreciating the value of the fund it is managing.
Another potential downfall in my eyes is, what if a cartel of leading/large banks decided to bluff the Chatbot? They could all enter the market in a contra-dealing way to the ‘robot’ and once again cause it to lose money.
It has been suggested that AI may become an ‘Assisted Driver’ as opposed to ‘Self-Driving’ investments for a good while to come.
RULES AND REGULATIONS
What impact if any does ChatGPT have on the financial regulatory framework? Could we in all seriousness expect a fully automated managed fund to act or operate within clear and specific rules, as laid down by the regulator? Obviously, human input at the beginning will define the parameters for the Chatbot to operate within, but would it be able to recognise inside-information as and when it appears? What about Consumer Duty? Would it know it’s obliged to please put the customer first?
Additionally, at what point does ChatGPT become an adviser in investments, if say a retail investor uses the app to make investment decisions on the back of implied investment recommendations made by the ChatGPT robots? Would the Financial Conduct Authority (FCA) have to revise its Perimeter Guidance (PERG) on the scope of regulated activities as a result of Artificial Intelligence apps such as ChatGPT? Would ChatGPT need to be authorised and regulated by the FCA in the future? Would the ‘robot’ be carrying out a client dealing function (the old CF30) requiring certification under the Senior Managers and Certification Regime?
These are just some arguments/matters that can be put forward in the Cons/Too Difficult/Requires Further Analysis column for AI within financial services. With all this in mind the UK’s competition watchdog has initiated a review of the AI market, very wisely too! It will only be a matter of time before the FCA review AI in earnest also.
If you would like more details or information about Artificial Intelligence and the regulatory environment, please contact either myself chris@ossconsult.co.uk or rod@ossconsult.co.uk .
Chris Watts.
June 2023
