Francesca Campanelli, Chief Commercial Officer, Axyon AI
The world has certainly been shaken by the global economic impact of the COVID-19 crisis, with the uncertainty causing market volatility across the board. The issue for asset management firms now is that they’re under pressure to adapt to this new post-COVID landscape and their focus is on demonstrating investment resilience to their clients.
So why the more positive outlook, and, therefore, expectations for 2021? Many people expect this year to be a better one for the stock market as the world economy beings to recover from the crisis. This time last year the world was in the middle of a vast market crash, caused by a global disaster that no one could have predicted.
2020 sparked a boom in first-time investors, with research from Alliance Trust suggesting that 66% of investors between the ages of 18 and 34 invested for the first time. Despite the financial strain the pandemic caused for many, others were left with extra disposable income and time on their hands during lockdown. These budding investors are more aware about technology and innovation and they ask for this in portfolio management.
Many investors will also be expecting better things in 2021 to make up for disappointing results in 2020 – the market shock caused by the pandemic hit fund managers hard. World stock markets plummeted during the initial uncertainty of the pandemic and, to give us an idea of the impact, in the first quarter of 2020 only 17% of U.S. large-cap quant mutual funds outperformed their benchmarks after fees.
Now however, the COVID-19 vaccine is being rolled out en masse in many countries and governments around the world have put together stimulus packages and policy changes in an attempt to protect businesses and individuals from financial difficulties. When the vaccine was first announced in the UK last November, for example, the stock market rose by 14% in just a week, and there’s hope that other markets will see the same happen as 2021 continues.
Asset management firms call for change
While the economic outlook for 2021 is brighter and people are willing to invest, fund managers are faced with a potential retention issue in the face of further volatility. Despite the fact that experts are predicting a strong global economic rebound, it’s almost impossible to predict what’s going to happen. But investor expectations remain high, and if those expectations aren’t met, the drop in business could be dramatic.
Traditional risk management methods faced some issues during the pandemic. The severe market shock at the onset of the COVID-19 pandemic pushed a large amount of chaotic data into the quantitative models. These models simply couldn’t cope – the predictive market views were also erratic.
Investors cannot tolerate huge drawdowns and they ask for more effective risk management to avoid unexpected loss. There’s also the very real possibility of a second market shock – for example, what happens if the virus mutates and impacts the efficacy of current vaccines? Despite the positive socio-economic changes that are happening globally, the world is still in the grip of a crisis and there’s no way of knowing whether the markets can avoid another drop.
Superior analytical power
The risk of investors losing confidence in their funds is a real one, so it’s crucial that asset management firms take steps to ensure they’re prepared for any potential future crashes. Using AI and deep learning systems to mitigate risk will go a long way towards making smarter and more profitable decisions and meeting investor expectations. AI-led hedge funds are proving to be high performers even in the wake of the pandemic, producing cumulative returns of 34% between May 2017 and May 2020 compared to only 12% for the global hedge fund industry.
Advanced AI systems are better equipped to weather volatile market conditions, picking up anomalies in the data and long-term trends that many traditional quantitative models could miss. Deep learning, an AI function that takes the technology to an even more advanced level, would further strengthen a model against chaotic data by allowing fund managers to see non-linear, complex patterns in asset behaviour. This leads to market view predictions of a much higher level, no matter how changeable market conditions become.
Asset management firms that don’t harness the superior analytical power of AI to meet their investors’ expectations will find themselves trailing behind the competition. 56% of hedge funds have said they planned to take advantage of machine learning in their trading process by 2021, and global investors were predicted to spend $900 million on alternative data by 2021 , almost doubling the 2017 spend.
Implementing these innovative technologies will undoubtedly be a powerful and intuitive solution to the problem of meeting investors’ expectations of mitigated risk and higher returns. It will also allow asset managers to demonstrate a tangible difference in their strategies. Rather than risking the repeat of an inability to manage chaotic data during a market crash, a better and more efficient usage of available data will help to mitigate downside risks and generate alpha, no matter how unpredictable world events become.
