Can Big Data and AI Replace Human Fund Managers?

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The integration of alternative data in finance has ushered in a transformative era, where traditional financial analysis is augmented by vast and unconventional datasets. These alternative data sources encompass a myriad of information, from satellite imagery tracking global supply chains to sentiment analysis of social media chatter. By leveraging big data analytics, financial institutions and investors can gain deeper insights into market trends, economic indicators, and even individual company performance.

As big data continues to evolve in the financial sector, a critical question persists: Can AI and big data replace humans in investment management? Reference [1] investigated this very question. The authors conducted research in the Chinese market. They pointed out,

First, the average return, Sharpe ratio, and stock-selection ability of traditional funds perform better than big data funds. However, big data funds show improved market-timing ability, but the result may not be very meaningful.

Second, when comparing the performance of each big data fund with its traditional peer funds, which share similar characteristics except stock selection, the big data factor fails to enhance stock-selection abilities, at least in the Chinese market.

Third, the performance of big data funds varies significantly, and fund managers exhibit differing skill levels. We previously believed that big data funds would have less luck in performance due to the use of objective quantitative investment technology, so the performance of big data funds is irrelevant to the fund manager, but the data we collected do not support this hypothesis. Furthermore, a comparison of the volatility between funds and groups shows that big data factors fail to improve fund performance persistence.

In brief, the paper demonstrated that in the current Chinese market, big data and AI technologies do not deliver superior performance to traditional counterparts among fund managers.

Our thoughts are the following,

  • Studies indicate that AI is indeed replacing humans in certain labour market sectors. However, within the investment management industry, it appears that specialized knowledge and skills remain irreplaceable, at least in the immediate future.
  • It’s worth noting that this study focused on the Chinese market. It would be interesting to see the results of similar research in the US and other developed markets.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Junsheng Zhang, Zezhi Peng, Yamin Zeng, Haisheng Yang, Do Big Data Mutual Funds Outperform?, Journal of International Financial Markets Institutions and Money DOI:10.1016/j.intfin.2023.101842

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