Artificial Intelligence Manages Your Assets — What Are Its Advantages?
AI methods allow you to process huge amounts of information, predict events and adapt behavior to your forecast. These opportunities give a huge advantage in such areas as investment management and trading. How exactly is artificial intelligence used in these fields and why is it beneficial?
First of all, the work of robot traders is based on the methods of machine learning. They are irreplaceable in systematic and high-frequency trading, where transaction speed and rapid response are the key to making profit. Robots offer a great advantage in this field. However, not only automation is important in trading: there are companies (for example, SNTMNT and Dataminr), where sentiment analysis and natural language processing (NLP) are used to predict the situation on the stock markets. For example, if you receive a negative forecast for the current client's portfolio, an immediate rebalancing will be performed.
For asset management, there are more than 100 robo-advisors, the largest of which are Personal Capital, Schwab, Betterment. They automatically provide services for portfolio optimization, taking into account numerous parameters - from the perception of risk by the client to his age group. Advantages of using robo-advisers are quantifiable. When using robo-advisers, funds management fee is significantly lower than in the case of traditional investment advisers. In some cases, the commission may even be zero (Wealthfront), and for most robo-advisors, the percentage starts at 0.25. Compare this with the fee of traditional financial advisers, which normally starts from 1%. Minimum investment sum, both in the case of investment platforms with AI, and in the case of robo-advisers is significantly lower than in the case of traditional investment vehicles.
There are robo-advisers, whose minimum account is only one euro, while many start their services from 100-200 euros. Some do not specify minimum balance requirements at all. Finally, unlike human advisers, robo-advisers are registered as fiduciary managers, in other words, they must put the client's interests above their own. An exchange broker is not necessarily a fiduciary, since there is an exception to the SEC rules for them. Brokers are only required to provide investment advice based on the financial situation of their client.
Machine learning finds application for analytics and portfolio optimization. Among the ten largest hedge funds in the world, six (including such giants as BlackRock, Man Group, JP Morgan Asset Management) are driven partially or fully by quantitative methods, including advanced data analysis and machine learning methods. Moreover, as shown by the research of TFH AI analysts, starting from 2014 average annual returns of 10 largest quantum (based entirely on quantative methods) fundsamounted to 35%, which makes them approximately twice more profitable than traditional funds. The same is true for AI-powered exchange investment funds (ETFs). Their annual returns make up on average 12.68%, which is higher than the average figures for stock exchange instruments.
Thus, artificial intelligence helps to overcome the main problems in asset management - a huge amount of data that is hard to be analyzed by a person and the risk to follow emotions and make an irrational decision. The use of AI algorithms is beneficial for both short-term and long-term investors.