• Francesca Campanelli, Chief Commercial Officer at Axyon AI


• 22.04.2021 03:30 pm
Investment

Recent market volatility continues to put pressure on fund managers, who must not only adapt to the post-COVID landscape but also demonstrate investment resilience and deliver returns to clients. 

Already, the economic outlook for 2021 is set to be brighter than 2020.  As the COVID-19 vaccine is being rolled out to millions across the world, stimulus packages and policy changes are breathing life back into many parts of the economy. The stock market has reacted strongly to these positive changes, demonstrated for example by the FTSE 100 rising by 14% in just a week when the UK vaccine was announced in November 2020.  However, despite experts predicting a strong global economic rebound, it remains almost impossible to predict what’s going to happen, and if investor expectations aren’t met, the drop in business could be dramatic.

Adding to the pressure is the fact many investors are expecting much better returns from the stock market in 2021. The significant growth of first-time investors with extra disposable income and time in 2020, with major online brokers such as Robinhood and Etrade seeing new accounts grow by as much as 170% in Q1 2020, has meant more investors expect innovative, technology-driven user experiences for portfolio management. For fund managers, meeting investor expectations will be the defining challenge for 2021.

Out of touch

In order to truly adapt to the post-COVID landscape, many funds must move on from traditional portfolio management methods which largely failed when the pandemic first struck. These models are built around strong assumptions on the behaviour of underlying assets and measuring normal distribution patterns on linear scales, meaning they are effective during times of market stability. However, these models cannot cope when the entire framework of the market changes quickly, meaning that through the COVID-19 pandemic, they were unable to handle the mass volume of chaotic data flooding in. As a result, fund managers’ ability to accurately analyse or predict where the market would go next and navigate through the crisis or manage risk effectively and make sure investments were protected was significantly limited.

With so much uncertainty remaining around the global recovery from COVID-19, fund managers cannot afford to face another market shock with outdated models, particularly with investors’ expectations around risk management increasing. Many investors will be less tolerant to suffering significant drawdowns this year, so fund managers must prepare properly for the event of a second drop.

Confidence booster

With investor confidence so delicately poised, more and more asset management firms are turning to AI and deep learning systems to ensure they’re prepared for any potential future market crashes. 56% of hedge funds have said they planned to take advantage of machine learning in their trading process by 2021, while global investors were predicted to spend $900 million on alternative data by 2021 , almost doubling the 2017 spend.

The driving factor behind the growing popularity of advanced AI systems such as deep learning is that they can adjust quickly to volatile market conditions, picking up anomalies from data and identifying long-term market trends well ahead of time. Deep learning is particularly well-equipped to filter through chaotic data and establish non-linear, complex patterns in asset behaviour. Through deep learning, fund managers can to gain enhanced market insights and predictions no matter how changeable market conditions become, which could be the difference between generating alpha or not during another market shock. 

And those firms who have embraced AI are already enjoying the rewards. AI-led hedge funds have proven 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. It’s clear that AI and deep learning systems can help managers mitigate risk while making smarter and more profitable decisions to meet investor expectations. 

Looking to the future 

Meeting investors’ expectations is an increasingly difficult task for asset management firms during a time of unprecedented volatility, but AI and deep learning technology can provide the solution to mitigate risk and making asset predictions more accurate to deliver higher returns. Not doing so increases the risk of being unprepared for a second market shock, something that could have a fatal impact on investor tolerance, something that could have significant short- and long-term business impacts.