Rise of the algorithms

AmInvest chief executive officer Datin Maznah Mahbob

Artificial intelligence set to disrupt asset management business in this region

THE ASSET management industry in this part of the world is ripe for a disruption with the advent of quantitative-styled investing methods.

Quantitative or quant funds employ artificial intelligence (AI) through specialised computer software or algorithms that study patterns and asset prices to use this information to execute trading strategies.

Such softwares reduce or totally eliminate the need for human intervention in the investing or trading process that is present in the traditional human discretional approach through fund managers and brokers.

“There are hardly any quant funds in the region now. Traditionally, people want a track record of investing.

“As most quant funds are new, they are usually assessed on their back-tested results,” AmInvest’s chief executive officer (CEO) Datin Maznah Mahbob tells StarBizWeek.

AmInvest is the fund-management arm of AMMB Holdings Bhd.

The emergence of such funds as an alternative to the active or discretional approach will further add to competition and pressure fund management fees downwards.

“Fund management fees for active funds have been under pressure for the past ten years, as most have struggled to outperform index funds and exchange traded funds, which are cheaper alternatives.

“The cost of managing funds could also come down with the rising popularity of quant funds,” Maznah says.

The local fund management industry has often been criticised for charging its retail clients fees that are deemed too high.

In particular, there is a fee called the entry fee of about 5% to 6% imposed on total funds invested.

In the case of fees for the Private Retirement Scheme, they are generally lower at around 1% to 3%.

However, an existing quant fund operator in Singapore thinks that the fee structure could be quite similar to discretionary funds.

Singapore-based CP Global Asset Management’s (CPG) CEO Raymond Tan says he does not anticipate a further reduction in fees with quant funds, as talent in AI development is extremely scarce today.

“With that being said, I believe we are in a business of offering performance instead of reducing fees, as we believe our investors are here to receive performance, not to pay fees,” Tan says.

CPG is one of the few quant fund operators in Singapore today with total assets under management at slightly below US$100mil (RM434mil).

Tan says CPG seeks an edge ​by quantifying the fundamental factors​ with machine-based learning and AI technologies​.

“This includes news reading and processing that is very similar to how a human would do it​,” he says.

He notes that quant funds are not new in the wider world and have been around since a decade ago, noting that AI hedge funds are much more prevalent in the United States, especially.

“The main difference between an AI quantitative approach and discretionary approach is that the former allows us to execute our trading strategies in a systematic and consistent manner, free from human bias and error,” Tan says.

With the potential rise of AI investing techniques in this part of the world, there is the debate of whether fund managers would be able to survive this potentially disruptive force.

Algorithm-based strategies

A Hong Kong-based fund manager says that in recent years, the discretionary approach hasn’t performed as well as before in equities because of market volatility and policy distortions.

Thus, incrementally, some investors are putting money to work with algorithm-based strategies which rely less on fundamental analyses and more on trading signals.

Even so, he says “it’s hard to pin down how much more one can make (or lose) with such strategies, because the quality of the algorithm is a big differentiator.

“Just like artwork, not all are created equal and few can stand the test of time,” he quips.

BlackRock, the world’s largest money manager, grabbed headlines recently with its shift to quantitative investment strategies.

In March, The Financial Times reported that the fund is overhauling its actively managed equities business by cutting jobs, dropping fees and relying more on computers to pick stocks in a move that highlights how difficult it has become for humans to beat the market.

BlackRock said the revamp was its biggest attempt to engineer a turnaround after having faced active stock fund withdrawals.

Industry insiders locally, however, note that not everyone is comfortable with AI black boxes handling their money, especially institutions because they are accountable to their investing community, board of trustees with corporate governance guidelines.

A check showed that institutions in Malaysia still employ the discretionary approach through brokers and fund managers.

“It is a time-tested way, plus I don’t think there is much more money to be made with AI trading. Everyone wants to beat the index but they cannot do so consistently,” a broker in a local bank-backed brokerage says.

However, industry players believe if the adoption of such techniques happens, it would first begin with retail investors who are free from the shackles of regulations.

Maznah believes that there could potentially be unanticipated demand for such investing methods.

“As quant funds are new, investors may not realise they would like it.

“It is like AirAsia or WhatsApp. How did we live without it prior to that? Before that, people didn’t even think or demand or feel for AirAsia’s or WhatsApp’s services. Innovation is like that, as you cannot prove that people actually want it before it is there,” Maznah says.

A Securities Commission (SC) spokesperson says that in Malaysia algorithmic trading is currently being carried out by licensed brokers and constitutes small percentage of the market trades.

“Brokers operating algorithmic trading systems are required to effectively manage and ensure system’s integrity as well as proper risk management including having strong pre-trade controls and post-trade monitoring,” the spokesperson says, adding that on its part, the SC would continue to surveil the market as part of its market integrity and systemic risk monitoring.

Locally, BIMB Investment Management Bhd, which is a unit of Bank Islam Malaysia Bhd, recently launched its fund using AI technology.

For this, BIMB Investment Management has tied up with strategic partner UK-based Arabesque Asset Management Ltd.

This partnership will see BIMB using Arabesque’s quantitative method system to help with the stock selection process.

Sources say at least two banks have come out with quant funds, but their launch has been shelved for now as these bank’s management would like to tread on the safe side.

Whether or not quant funds outperform the traditional discretionary approach of investing is still very much open to debate.

A local fund manager notes that this would depend on the investing method being employed, noting that even Warren Buffet and George Soros all have different investing styles.

“The key would be in the strategies that are being employed in the AI-black box,” the fund manager says.