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The asset management firm of the future is likely to more closely resemble a technology firm than it ever has before

Artificial intelligence and machine learning are already a fact of life. In Australia, as in the rest of the world, this subset of applied mathematics, which uses algorithms to learn from and make predictions using data, is already being used in investment management. And the world’s most advanced technology companies are also pouring billions of dollars into the area.

The rise of artificial intelligence and its role in investment management has in part been made possible by the exponential rise in the amount of data available for collection and analysis. Indeed, words struggle to convey its sheer volume. On any given day at CFM we collect and analyse over 2.5 terabytes of information, mainly in the form of market data. That’s equivalent in scale to a typical academic research library.

Growth in the quantity of data we have access to has been exponential over the past few years, and this trend will undoubtedly continue. This means that – in the short term at least – firms and people comfortable working with big data sets will have a clear competitive advantage. And over time, what we see now as a competitive advantage will in fact become a prerequisite to compete at all.

In the 26 years our firm has been operating we’ve witnessed the end of many technologies once thought to be at the cutting edge of technology, including the fax machine, the telex and even the telephone as a means of placing orders. As a result, for the companies which had the foresight to see its inevitable rise and to invest in it, technology has revolutionised both the collection and analysis of data, as well as the interaction with the local and global exchanges which underpin financial markets.

All of this means that the asset management firm of the future is likely to more closely resemble a technology firm than it ever has before.

At CFM, we use servers to collect data and powerful computers to execute trades and monitor the impact of our trading on the market. But this doesn’t mean that the future is simply a case of the march of the robots. The people we hire, from academic backgrounds like engineering and science, will become ever more prevalent in asset management. And the emphasis will continue to shift from firms full of people trying to read the markets to people who can manage and build the machines and algorithms that trade the markets.

What’s important, however, is to understand that systematic trading isn’t something to fear. And it isn’t something new. After all, index investing is actually the simplest and oldest quantitative strategy around. And the reality is that more and more investors are beginning to acknowledge that, on average, they are better off tracking an index than giving their money to an active manager, which is a fairly monumental shift in thinking, given how long active management has been seen as being synonymous with asset management.

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CAPITAL FUND MANAGEMENT LLP (CFM)
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