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How data revolution is changing the world of asset management

Big data and AI remain extraordinarily fertile grounds for experimentation.

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Recent developments in machine learning suggest that technological developments have advanced significantly.

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The writer is vice-president, Hedge Fund Specialist, Credit Suisse Private Banking Asia Pacific.

SOMETIMES it feels as if our computers know us better than we know ourselves.

Amazon seems to know what we may want to buy based on our previous purchases. Google completes our search sentences before we are done typing them. Facebook identifies our friends in pictures through face recognition. Touching videos of our children can be created at a click.

Technology has revolutionised our everyday lives. What has enabled all the above developments are the gargantuan amounts of data being generated every day - some 2.5 quintillion bytes worth. And 90 per cent of the data available has been created only over the past two years.

The abundance of data is also enabling new developments in machine learning or artificial intelligence (AI). These terms describe a process that allows computers to identify repeatable patterns without human intervention.

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Recent developments in machine learning suggest that technological developments have advanced significantly. In 2017, Google's AlphaGo program defeated the world No 1 player of the board game Go, previously regarded as too complex for a machine to play well.

Machines powered by AI have also started to beat humans at poker. This is an impressive feat as decisions in poker are made with imperfect information, requiring an accurate interpretation of human behaviour.

Technology is also changing the world of hedge funds. Exponentially large amounts of data, combined with the ever increasing processing power of computers, are giving rise to more systematic managers that are adapting big data/AI in their investment process.

Systematic funds use various techniques to synthesise information more efficiently. For example, natural language processing can interpret social media flows to determine if a piece of news is positive or negative.

Satellite images of cars at a mall carpark can be used to predict sales numbers. Weather patterns can be analysed to predict crop prices. An increasing number of managers are applying AI and big data to optimise their trading costs, to improve overall performance.

Flows into systematic funds have accelerated in recent years. Systematic managers now handle about US$500 billion in assets - triple the amount in 2005. Assets invested in systematic strategies account for about 20 per cent of assets under management for the entire hedge fund industry.

The rising interest in systematic managers is not surprising, as they add substantial benefits to portfolios. Systematic managers tend to be liquid and can offer investors diversification, due to a low correlation of strategies to traditional asset classes.

As their strategies are rules-based, emotional biasness is eliminated from investing, potentially giving systematic strategies an edge over discretionary managers. Steadier returns can be achieved especially during crises. For example, a subset of systematic funds, known as commodity trading advisors, delivered more than 30 per cent returns during the financial crisis of 2008.

But there are risks to consider. Relying purely on computers can be dangerous as data nuances can be misinterpreted. Computers might also be unable to analyse the bigger picture, such as political shifts and changes in economic regimes. As such, the majority of systematic hedge funds still use substantial human oversight.

Another issue is that some tech-savvy firms can also be less transparent with their investors. It is important to partner with someone who can adequately analyse and monitor these managers.

Systematic fund managers who can extract the maximum advantage from the rise of big data and AI in investing will be those who are larger and more established. These managers possess the capital to acquire and analyse vast amounts of data.

They are also blurring the lines between science and investing. Many hire academics from top universities rather than traditional finance professionals. Systematic hedge fund employees might, for example, have worked on the machine which defeated world chess champion Garry Kasparov or on Google search engines.

Ultimately, the data revolution is changing the world of asset management. Big data and AI remain extraordinarily fertile grounds for experimentation, in the relentless quest for outperformance.

After all, if you can predict the next chess move or the next word in a sentence, you might also be able to predict the next price move in financial markets. It is worth taking a bite, or shall we say, a byte.

  • The writer is vice-president, Hedge Fund Specialist, Credit Suisse Private Banking Asia Pacific