In the following analysis for Wealth DFM magazine, Elias Nechachby, MoSAIQ Founder and Portfolio Manager at Icon Asset Management explains why and how the use of advanced AI tools can support the needs of wealth managers in making investment decisions.
The alternative investments landscape has undergone significant growth post-Global Financial Crisis, with the CAIA estimating that assets under management (AUM) have soared to an impressive $22 trillion in 2024, 15% of all global AUM[1]. 20 years ago, this figure was just $4.8 trillion. This surge has largely been driven by investors seeking diversification and long-term growth potential outside traditional asset classes. The shift is evident among financial advisers, with recommendations for alternatives rising from 25% in 2020 to 55% in 2024[2]. Yet, as the range of options expands, so does the complexity of navigating this space.
Not all alternative strategies are equal, and selecting the right approach has become paramount for both wealth managers and discretionary fund managers, with technology, in particular, artificial intelligence (AI), emerging as a critical component. Approximately 75% of asset allocators now recognise AI’s potential to enhance investment decision-making[3], especially in a market where nuanced decisions and constant market fluctuations are ever more crucial. AI-driven solutions, including Icon Asset Management’s MoSAIQ strategy, can provide investors with a tool to develop portfolios that are more resilient, agile, and diverse, to withstand market volatility.
Resisting market downturns
Geopolitical unrest in the Middle East, Ukraine, and a too-close-to-call US election will likely create market turbulence, but the ability to remain resilient during downturns is what sets effective strategies apart. Technology plays a central role in building such resilience, with 92% of alternative fund managers now incorporating AI to assess and manage risk[4].
The role of AI in this regard extends beyond mere risk mitigation. By allowing managers to monitor the market in real time, it offers a pathway to consistent returns, dynamically adjusting to changing market conditions to ensure that portfolios remain balanced and adaptable in an unpredictable environment. Indeed, AI models can not only analyse current markets, but also forecast future market movements through analysis of historical data and current market conditions[5].
AI also offers the ability to synthesise textual information quickly, processing vast amounts of reports, corporate earnings and more in a holistic way, providing more accurate and differentiated investment insights. For wealth managers and discretionary fund managers, this means better safeguarding clients’ assets and ensuring sustained growth, regardless of broader economic volatility.
Utilising data for robust returns
In today’s fast-paced investment environment, data is more than just a resource—it is a competitive advantage. An impressive 78% of global asset allocators[6] believe that AI can significantly enhance decision-making by automating and analysing complex data sets. For discretionary fund managers, the ability to access and interpret vast amounts of market data in real-time is invaluable.
Advanced AI tools provide asset managers with the ability to continuously monitor market movements while also adapting and improving over time. Techniques such as genetic algorithms and AI ensembles allow for the identification of consistent relationships between input variables and outputs, enabling identification of key parameters for entry and exit signals. This approach enables the development of robust predictive models that can significantly outperform traditional benchmarks. The integration of controlled learning mechanisms allows these models to evolve based on new data, enhancing their accuracy and effectiveness in real-time applications.
With over 60 million historical data points informing investment decisions, MoSAIQ’s controlled learning enables its models to adapt from new data and refine their approach over time. This strategic adaptability ensures that the system maintains monthly neutrality by deploying a dynamic hedge that excels in volatile conditions. With a 18.37% annualised internal rate of return (IRR) since October 2019, the strategy not only protects during downturns but also consistently surpasses benchmarks. Such agility is indispensable in today’s unpredictable market, highlighting the essential role of AI in enabling wealth managers to monitor, adapt, and stay ahead of the curve.
Achieving ‘true’ diversification
Diversification has always been a cornerstone of effective wealth management, but traditional approaches can fall short in today’s interconnected world. AI and data analytics enable fund managers to fine-tune their asset allocations, identifying investments with low correlations to traditional equities and bonds, allowing for more optimised allocation. This precision in diversification helps create portfolios that are more resilient to economic shifts.
AI-driven models, including MoSAIQ’s strategy, can achieve this ‘true’ diversification. By using advanced algorithms to identify opportunities that remain uncorrelated to traditional markets, the strategy optimises asset allocation, ensuring portfolios are adaptable and positioned for consistent performance. In addition, such AI investment solutions can provide custom, tailored capabilities that fit the need for each manager.
AI-driven strategies are no longer a theoretical concept; they are a practical necessity for anyone looking to navigate the complexities of the alternatives market. As investors demand greater diversification and resilience, those who adopt AI-driven insights will be better positioned to deliver sustainable, long-term results and additional alpha for their clients, with greater precision, resilience, and success.
[1] https://caia.org/content/january-2024-next-20-trillion-alternative-investments
[2] https://www2.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-outlooks/banking-industry-outlook.html
[3] https://wifitalents.com/statistic/ai-in-the-asset-management-industry/
[4] https://www.hedgeweek.com/over-90-of-alt-fund-managers-using-ai-for-risk-and-compliance/
[5] https://www.alpha-sense.com/blog/trends/generative-ai-in-hedge-funds/
[6] https://www.ey.com/content/dam/ey-unified-site/ey-com/en-gl/industries/wealth-asset-management/documents/ey-gl-genai-wam-survey-highlights-03-2024.pdf
