How Is Blockchain And Artificial Intelligence Changing The Face Of Asset Management?
Article Published by: forbes
Asset management has a rich and traditional past that has helped build many people’s fortunes over the years; many of the world’s uber-rich have their backgrounds in hedge funds and other forms of smart asset management.
However, like everything at this juncture in time, there is a change in the wind and asset management is not immune. The access to funds, and investing opportunities have been opened up and become more inclusive. But with that, there has been a demand for better performance or lower fees from this new breed of investor.
Large mutual funds were used to getting away with charging annual fees of 2-4 percent, despite average or poor performance as they had the backing of an institutionalised elite. Nowadays, those that are looking to participate in the market have moved en masse away from these types of investments and instead focused on very low fee, index-based, managers.
The demand increase for these types of funds and management has caused intense competition to develop as there is far more option and ease when it comes shifting money and investments around. For this reason, asset management has had to start looking forward rather than languishing on its stuffy past.
Big Data, Blockchain and Artificial Intelligence are all tools that are starting to find their feet in the asset management market as different companies and managers look to utilise these different burgeoning technologies to give themselves a competitive edge.
Successful asset management services are reliant on vast amounts of data, so it immediately makes sense that the science behind Big Data and the analytical power that comes with it be pointed towards asset management.
More so, Big Data is fuel for AI and as such, it can not only provide descriptive market insights but can also recommend prescriptive actions for future to maximise return on investment based on proper data fed to it.
Then there is Blockchain which is also starting to show its collaborative powers within data services and its affiliation with these other technologies, such as AI and IoT. Thus, the tokenisation and distributed ledger that blockchain offers makes complete sense in this financial space of asset management.
Understanding the need to evolve
Asset, or wealth, management is a term that was first seen in 1933, and since then it has been slowly evolving and changing – but always looking to deliver the same outcome for customers. Asset management has also grown in recent times where major banks and financial institutions have come in to offer services while hedge funds are also playing a huge role.
But, the capitalist and elite nature of this investing ecosystem has always been quite exclusionary and closed-minded, a standpoint which is no longer so freely accepted. The general global trend has become far more inclusionary regardless of the sector, but especially when it comes to wealth and access to money.
Edgar Radjabli, the Managing Partner of Apis Capital Management, an asset management company that is utilising blockchain and AI in their services, explains how things are changing, out of necessity.
“Traditional asset management is changing because investors are demanding better performance or lower fees,” explains Radjabli. “In the past, large mutual funds could get away with charging annual fees of 2-4%, yet continued to underperform the market. As a result, for those that are looking to simply participate in the market, they have moved in masses away from these types of investments and focused on very low fee, index-based managers.”
“That being said, higher net worth investors who can invest in hedge funds are looking for funds that significantly and consistently outperform the market. To do so, those asset managers need to develop strategies that are more advanced than ever, and that is where AI comes in.”
“In the past, asset managers would create strategies from backtested data and let them run, hoping that what worked in the past will continue to work. Alternatively, they rely too much on discretionary trading, lacking a clear and consistent direction and making them prone to human mistakes and breakdown in discipline or risk management.”
The demands of the investor, be they participatory first-timers or even hardened veterans throwing large sums of money around, have certainly gotten higher. The result are sought, and those results are just not coming from traditional methods, but the reliance on new technologies is helping.
Radjabli adds how blockchain is also playing its part:
“Blockchain technology also offers the opportunity for asset managers to implement innovative administrative protocols. Typically, asset managers use a third party administrator to record ownership of shares or LP interests by investors. This can make it difficult to administer huge numbers of shareholders. Blockchain technology allows this because all ownership is registered by an immutable, independent and permanent ledger.”
“Also, blockchain protocols like Stellar allow an investor to hold multiple Asset Tokens in one account. So they could easily be invested in a hedge fund like Apis, a piece of real estate in NYC, a gold mine, and a startup company. Until now, this was not possible because all of those investments would be administered separately.”
Moving with the times
It is not only Radjabli and Apis that are seeing this, but companies on the scale of IBM have also started dipping into new technology to aid in asset management offerings. IBM have recently introduced the Maximo Network on blockchain, a product designed to complement the industry leading asset management capabilities already offered by Maximo (an Enterprise Asset Management tool that lets an individual maintain all asset types, check their health in real time and streamline global operations, from procurement to contract management – this is also done utilising IoT)
IBM state their reasons why blockchain specifically can enhance asset management. Firstly, they believe it enables open collaboration, creates asset and transaction transparency and finally, enforces consistency.
This is also backed up by Radjabli, who identifies much of blockchain’s power, regardless of sector, when it comes to simplifying and making operations more efficient. He also touches on the power that AI has in helping with creating investing strategies that are dynamic.
“Blockchain is perfectly suited for asset management to simplify administration and reduce costs, as well as provide innovative asset structures that maximise investor returns. AI provides the opportunity to build “evolving strategies” which consistently read and digest new market data,” Radjabli adds.
Still work to be done.
Of course, like most other sectors that are looking to utilise and implement new and emerging technologies, there is still a long way to go in making them the industry standard, but it is clear that the likes of AI and blockchain have a place in this industry.
There have already been attempts to upgrade and advance the asset management industry, but in comparison to what AI and blockchain can offer, these advancements seem a little superficial and quite specialised.
There has been a rise in so-called robo-advisors which are attempting to automate the investing process. These robo-advisors are based on Modern Portfolio Theory and the Efficient Market Hypothesis and use a method to determine exactly how to invest on your behalf.
While there are often times when these automated investors are successful, they are not an all-encompassing answer and appear to be more of a stop-gap while right technologies acclimatise to the asset management market.
“Robo advisors are not really AI or blockchain,” says Radjabli. “While they have a great place as a cheap automated way to invest in the broad stock market, and certainly are better than mutual funds, they do not provide any long term performance benefits.”
“The more interesting implementation of AI, specifically machine learning, is for innovative asset managers who are building evolving strategies that learn to adapt to the market, and generate better long term returns than “pre-packaged” strategies that are just based on back-tested data or traditional economics.”
A tokenised future
Another benefit of blockchain that perhaps is still also a long way off is the tokenisation of assets. Already we are seeing instances where traditional investment assets are being tokenised on the blockchain to make the management of these assets far more accessible and efficient.
There is no doubt that tokenisation will come more and more into play in the financial sector, including investing and asset management, once the regulatory standpoint has been found.
Radjabli agrees with the above, adding that those who use the other benefits of emerging technology along with the tokenisation will be able to offer the most attractive options to investors.
“The future of Asset Management will move towards investments being offered as Asset Tokens, rather than being administered by specialised administrators on their own ledgers (although the administrators will not go away, they will adapt their systems to use blockchain). The future of high performing hedge funds inevitable will favour those that incorporate AI and machine learning to build “evolving strategies’ that learn from the present and will outperform traditional buy and hold or passive investing,” he concludes.
About Jaime Bonetti Zeller
Jaime Bonetti Zeller is an investment professional and entrepreneur with businesses in multiple industries. He is president of Servicios Consulares Eurodom, the local partner in the Caribbean region for VFS Global, a leader global outsourcing and technology services specialist for diplomatic missions and governments worldwide. Jaime Bonetti Zeller also started the company Sofratesa de Panama inc., an organization in the engineering services industry located in Panama City.