AI Investment Management: The Future of Portfolio Strategies
AI has been handy to affix life conveniently, and it does most things better than humans including calculating, data managing, and even strategies. As we move further into the digital age, the use of AI and machine learning is becoming more commonplace to streamline the hassles of our daily lives.
Recently, AI had become highly in demand in the financial sector due to its ability to process large amounts of data effectively. An unexpected benefit of the transition had been the democratisation of the investment industry. Investment used to be only for the finance savvy individuals. Thus, the availability of information through AI has broken the barrier of investing for everyone.
What Is AI Investing?
AI investing, also known as “algorithmic trading” or “Robo investing”, is a practice of using advanced financial software algorithms to make investment decisions on behalf of investors and manage investment portfolios. This doesn’t mean that there will be no human touch present in investment portfolio management but while financial professionals design the investment strategies to be employed by an AI Investment Software, the ongoing day-to-day management of the portfolios is handled by the AI.
Through AI, investment calculations can be done at warp speed and thus accelerating the process of determining the best available trades with the minimum risk. AI investment has been around since the 70s but it was just widely implemented recently. Most traditional investment management companies require their clients to maintain substantial account balances, with higher annual management fees while on the other hand, AI investing management companies imply low or no minimum balance requirements and charge affordable annual fees.
AI Implementation in Investments
There is a widespread financial tree, but the branch of hedge funds leverages AI the most, implementing the concept of machine learning and feeding advanced software with large data sets on market behaviours along with pattern recognition.
Machines and systems with larger volumes of data, larger data types (be careful not to overfit) and more enhanced ability to learn will provide higher predictive capabilities.
Imagine a machine that can learn more about the market as it goes. Imagine one that can develop even more complex algorithms designed to buy or sell at the appropriate moment. That’s how powerful AI can be to an investor if designed and utilised optimally.
How Does AI Support Investment Management?
AI allows fund managers to develop a comprehensive knowledge of the market and how they react. Developing this knowledge can be very time-consuming and AI have the ability to process massive amounts of information very quickly.
In addition, AI also offers investors the ability to swiftly sort accurate information between relevant and irrelevant material. Relevant material is applied in the strategy while irrelevant information is discarded or ignored. Additional information allows investors to calibrate the market better and contributes to an easy-to-digest analysis strategy of the fortuity next step. While hedge fund managers and investors have their entire careers to develop a working knowledge of a market, AI can take in terabytes of information in a relatively short period. This can increase the probability of structuring a winning investment strategy.
AI Usage in Portfolio Management
AI is a common tool in portfolio management for its data processing capabilities. The data acquisition components of AI allow for a more efficient data collection process. Overseeing your existing investments requires extensive knowledge of market trends and the predictive ability to distinguish market movements in correlation with all the investments in the portfolio.
AI Investment allows portfolio managers to:
- Trade Management – Execution of large trades requires technical analysis, predictions, and cost assessment.
- Sentiment and Textual Analysis – Annual and economic reports require textual analysis to pinpoint the potential over/underperformance of various stocks.
- Risk Management – AI provides qualitative data analysis of existing models to determine the best course of action.
- Investment -. AI sets minimum thresholds or restricts asset class information to ensure sound investment decisions.
The Advantages of AI Technology for Investors
- Passive Investments – The ability for investing varies from one individual to another. For investors who are not comfortable making their own investment decisions or don’t have the luxury to spend a lot of time researching, monitoring and rebalancing their portfolio, then AI investing can be a good alternative.
- Portfolio Diversification – Having several types of investments in a portfolio helps to spread risk. This means that if a particular investment in the portfolio performs badly, the impact won’t be severe as there are other investments to lower the portfolio risk.
- Zero-Emotion Investing – Some investors tend to act the reverse way to market performance where some withdraw their money in a downturn or pump in more cash when the market rises. AI eliminates this external factor. A popular use case is the dollar-cost averaging (DCA) approach performed by investing a fixed amount every month, avoiding emotion-driven impulses to buy and sell based on market sentiment.
- Low Fees – AI Investing charges low management fees that are typically below 1% per annum. By contrast, investing in a traditional mutual fund or ETF or Robo-advisory platform will require you to fork out 0.5% to 2.5% per annum, with some charging up to 5% at redemption.
Last but not least, it is crucial to note that while AI is a powerful investment tool, it is not a perfect solution for an investor’s financial strategy. AI will provide strategies according to data availability but it’s limited when considering certain external factors such as investors’ personal obligations or black swan events.
In other words, AI can tell you when the market is ready for investment but not when you are. Thus, professionals’ human element will remain critical for most investment strategies. It is important to pick the right AI Investment product that comes with a high market professional as the backbone.
None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.
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