Al Naqvi - Artificial Intelligence for Asset Management and Investment

Now we shift our attention to business factors. In this we use the above factors to architect our business to create a viable and well-performing investment management firm with (see Figure 2.1):

Alpha-generating capability: It refers to the ability to develop and execute investment strategies that result in creating a strong alpha. The obvious challenge here is uniqueness. If your investment strategy is easily decipherable or discoverable by others, the advantage gap will close quickly. However, if we decompose the steps needed to create a strong alpha in the AI era, we will realize that the ability to discover or replicate our strategy will greatly depend on competitors' ability to have the same data, apply similar algorithms, perform similar evaluations, and receive similar results. Results in this case imply persistent alpha generation through various existing and newly discovered strategies.Design ConstructsExtent and Quality of IntelligenceSequence of Intelligence and ActionDataAlpha-generating capability✓✓✓✓Responsiveness and awareness✓✓✓✓Client orientation✓✓✓✓Cost✓✓✓✓Human talent–centric✓✓✓✓Innovation✓✓✓✓Advice✓✓✓✓Client knowledge✓✓✓✓Regulatory standards compliance✓✓✓✓Risk management✓✓✓✓Corporate social responsibility✓✓✓✓Auditing, assurance, and governance✓✓✓✓ FIGURE 2.1 The Strategic Capability Building

Responsiveness and awareness: We want to build a firm that is more aware and responsive. Aware implies being cognizant of what is transpiring in the environment (for example, markets, industries, sectors, economies, and assets), knowledgeable about clients, and mindful about what is happening inside the firm. Inside the firm implies knowing about our own structures, styles, biases, psychology, interests, social and cultural cues, and other similar information.

Client orientation: A client-oriented firm equips and enables clients with information, knowledge, and services that empower the clients (retail or institutional). Enabling that empowerment means the firm adds value for clients that goes above and beyond delivering alpha.

Cost: The firm keeps its costs low. This means it can compete based on cost. When combined with other aspects as discussed in this section, a low-cost operator can be the price leader and also create good margins.

Human talent–centric: The AI era should not be misconstrued as the end of human talent era. If anything, AI will make possible more engaged, more empowered, and happier human employees. If managed right, AI can help improve the culture, create new and improved social dynamics, discourage destructive politics, and build a more positive work environment.

Innovation: Innovation in terms of discovering assets, portfolios, alpha strategies, products, services, and client enablement is a powerful advantage.

Advice: For firms where service design is primarily based on advice, the quality and timeliness of advice can be tremendously valuable. Advice can be offered via machine only or a machine-human combination.

Client knowledge: A winning firm possesses deep information about clients and uses that to help clients in the best possible way.

Regulatory standards compliance: A successful firm meets the regulatory and compliance requirements.

Risk Management: A responsible firm ensures multidimensional risk management.

Corporate Social Responsibility: This means that the firm actively searches for issues that are material for its stakeholders and develops responsible responses to those issues. The firm fulfills its social responsibility and ethical obligations.

Audit, assurance, and governance: In addition to market-centric risk management, the firm must develop superior capabilities in auditing, assurance, and governance areas.

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