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The need for AI and machine learning in volatile markets

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AI and machine learning

Francesca CCO at Axyon AI

 

Since the outset of the pandemic, the global economy has experienced much uncertainty. Although many people expected this year to be another good year for the stock market as the world economy continues recovering from the crisis, fears over the recent developments of the Omicron variant, together with unclear messages from central banks, have caused more instability. This market volatility presents fund managers with significant operational and performance-related challenges and a potential retention issue in the face of further volatility due to new variants and unexpected developments. So, how can AI and machine learning help investors prepare for this volatility and demonstrate resilience to their clients?

 

AI’s transformative role for asset management firms

Ultimately, AI and machine learning enable fund and asset managers to gain valuable time to adjust risk and protect investments with the intrinsic value of predictive analytics. It can also help businesses navigate challenging conditions by detecting anomalies in the market before any crisis occurs. By implementing AI, fund and asset managers can also monetise data and improve automation from the front to the back office.

 

AI vs. traditional models

While nobody can predict the unpredictable, market disruption is often on the cards. Many investors have lost confidence in asset managers who managed portfolios using traditional quantitative models, as they struggled to keep up with volatile market conditions. As such, funds need to find a way to better mitigate the risks with powerful predictive analytics of fast-moving markets and avoid losing investor confidence. In today’s world, relying on traditional portfolio management models when a market crisis occurs can result in the investments becoming severely impaired and can push a large amount of chaotic data into quantitative models. Therefore, asset managers need a system that can account for volatility and manage expectations more accurately.

Traditional portfolio models are built around strong assumptions on the behaviour of underlying assets, measuring normal distribution patterns on linear scales. As a result, they find it difficult to cope with the flood of chaotic data into their systems caused by high levels of volatility and fund managers’ ability to accurately analyse and predict where the market would go next and navigate through the crisis was significantly limited. Throughout the COVID-19 pandemic and consequent volatility, businesses with these models have had their limitations exposed.

Advanced AI systems are unrivalled from portfolio management to risk management for example detecting anomalies in the market. AI models can handle large and chaotic sets of data learning from the past the actual relationship among variables. Moreover, the application of advanced analytics to these data sets may also provide more real-time insight into the risks related to these shocks for the stock market.

Unlike these traditional models, AI systems are completely agnostic about markets and their associated risks, meaning that they can be trained to sound the alarm when the structure in the data is anomalous, and therefore could be a sign of an upcoming unpredictable event. These AI-powered tools can be also used to read the reality of the situation at hand, without any pre-ordered rules.

By strengthening a model against chaotic data, AI allows fund managers to see non-linear, complex patterns in asset behaviours that can be captured, and make market view predictions at a higher level, no matter how changeable conditions become.

 

Turning Point: The pandemic as an opportunity for change

The pandemic is still an opportunity for new technologies to prove their merits and show that AI and machine learning can offer a better way to use data and quickly adapt to the ever-changing ‘new normal’. By modelling the potential repercussions of major geopolitical, financial, or environmental events, businesses will be better placed to adapt, reposition, and overcome the obstacles the pandemic presents.

We have seen that investment in technology and data infrastructure is working its way up asset managers’ agendas, and AI and machine learning has by no means reached its limits. Advancements in technology will mean improvements to business performance will continue, and due to the wealth of data already stored in most financial institutions, there is great potential to build on the success of previous solutions. Businesses who are late to harness the superior analytical power of AI will likely find themselves trailing behind the competition. Implementing these innovative machine learning technologies will undoubtedly be a powerful solution to the problem of meeting and exceeding investors’ expectations of mitigated risk and higher returns.

 

Banking

Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study

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Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute

 

Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.

The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.

Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.

 

THE RISE OF ESG

ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.

The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.

There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.

What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.

TECHNOLOGY MULTIPLIES TRUST

Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.

The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.

It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.

 

THE PULL OF PERSONALISATION

How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.

Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.

So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).

When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.

 

TRUST IN THE FUTURE

As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.

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Technology

UK Organisations turn to artificial intelligence to fight sophisticated cyberattacks

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New research by cybersecurity expert Mimecast finds that email attacks are becoming more frequent and sophisticated

More and more companies in the UK are using artificial intelligence (AI) and machine learning (ML) to fend off increasingly sophisticated cyber-attacks, according to new research from cybersecurity specialist Mimecast. The research finds that 40% of UK organisations are already using AI or ML in their organisations’ cybersecurity programme, with 30% planning to do so within the next 12 months.

The use of advanced technologies such as AI and ML is in direct response to the growing sophistication of cyberattacks that UK businesses are experiencing. 53% believe that increasingly sophisticated attacks will be their biggest email security challenge in 2022, leading to 80% believing it is at least likely their organisation will suffer a negative business impact from an email-borne attack this year.

 

Growing threat landscape

The research shows that email remains the largest threat vector for UK businesses, with 71% of respondents reporting an increase in the volume of email threats their organisation has faced in the last 12 months. This includes phishing with malicious links or attachments (56%), impersonation fraud or Business Email Compromise (53%), and malicious insiders (43%). However, it isn’t just email attacks that are on the rise, as 90% of UK businesses experienced at least one spoofing attack that uses a lookalike web domain or a clone of their organisation’s website in the last 12 months. The average UK company has experienced 11 of these attacks.

On top of this, employees are also presenting organisations with a very real threat to their cybersecurity. The survey identifies that IT decision makers have relatively low confidence in their colleagues’ cyber awareness , believing that there is a risk of an employee making a serious security risk due to oversharing company information on social media (84%), poor password hygeine (80%), using personal email (80%), or using cloud storage and other shadow IT functionality (81%). When an employee does full victim to an attack, it frequently results in more widespread consequences. 85% of respondents say threats have spread from one infected user to other members of the organisation.

 

AI to the rescue

To overcome this growing threat landscape, more and more UK organisations are turning to advanced technologies to strengthen their cybersecurity position. The 40% of UK organisations that are already using AI as part of their cybersecurity strategy are already seeing a number of benefits, including increased accuracy in terms of threat detection (54%), reduced human error within cybersecurity team (51%), and reduced workload/working hours for cybersecurity team (45%).

Despite these very real benefits, there is the very real danger that many UK organisations will miss out due to a lack of budget dedicated to cybersecurity. The research highlights a clear discrepancy between the amount IT decision makers believe should be spent on cyber resilience and how much budget is actually allocated by business leaders. IT decision makers in the UK believe that 16% of their IT budget should be allocated to cyber, but at the moment they see less than 12% allocated. Missing out on new technology innovations such as AI is identified as the most likely consequence (49%) for organisations where the cybersecurity budget is not as high as respondents believe it should be.

Elaine Lee, AI expert at Mimecast, said: “There is no doubt that cyberattacks are becoming more frequent, as UK businesses adjust to the world of hybrid work. On top of this increase in frequency, we are also seeing a rise in the sophistication of attacks. This is creating a perfect storm and making it more difficult than ever for organisations to keep their businesses secure. With this in mind, it is no surprise to see so many organisations turn to advanced technologies such as AI to bolster their cybersecurity defences. AI solutions can help businesses to automate security processes, ensuring they are better able to fend off attacks, as well as providing their security experts with more time to focus on high-level analyses that require human interaction.”

Lee continued: “Organisations that have yet to invest in AI technologies as part of their cybersecurity strategy should do so. Cyberattacks are going to continue to be a major threat to UK businesses and these businesses need to respond accordingly with sufficient budget. A successful cyberattack has the potential to cause serious ramifications for a business, including both financial and reputational damage. Now is the time to take this threat seriously and get prepared.”

 

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