Stanford Professor’s Killer AI Fund Manager Crushes Humans: 93% of Analysts’ Jobs at Risk
Examining AI’s Potential in the Finance World
A recent study conducted by researchers at Stanford University and Boston College has shed new light on the potential impact of artificial intelligence (AI) on the finance world. By simulating a scenario where an "AI analyst" is given the chance to modify the portfolios of over 3,300 actively managed and diversified mutual funds every three months, the study found that the bot’s modified portfolios significantly outperformed those of human managers. In fact, 93% of the bot’s AI-modified portfolios beat the human managers over their funds’ lifetimes.
The Study’s Methodology
To conduct this experiment, researchers developed a random forest model that allowed them to analyze publicly available data such as financial reports, analyst forecasts, and price quotes. This model was then used to simulate the performance of the bot’s modified portfolios over a period of 30 years, from 1990 to 2020. The results were astonishing: the bot-managed funds earned $17.1 million more in quarterly alpha (market-beating returns) than human managers.
The Implications of the Study
While some experts may see this study as a harbinger for the downfall of human portfolio managers, others caution against taking the results too literally. Ed deHaan, a professor of accounting at Stanford Graduate School of Business and one of the study’s authors, emphasized that the AI did not find gains by pulling obscure information or signals that humans would have missed. Instead, it relied on different sets of variables to repeatedly make new predictions.
The Role of Junior Analysts
Junior analysts may be particularly affected by this shift towards AI-driven portfolio management. According to deHaan, sitting around and crunching Excel spreadsheets is a job that will likely become obsolete in the next five years. "I don’t think it’s a job that will exist in a material sense in five years," he said.
The Challenges of Implementing AI
While the study suggests that AI has the potential to significantly boost most fund managers’ returns by de-risking their portfolios, there are several challenges associated with implementing this technology. For one, as soon as everybody starts using it, the game changes. In other words, if all funds have access to the same technology, it will no longer provide a competitive advantage.
The Earnings of Human Managers
In order to match the bot’s returns, human managers would need to quintuple their fees, according to deHaan. However, this is not feasible in reality due to various frictions organizations face in adopting new technology, particularly in a regulated space.
Active Managers and AI
Will active managers stick around? While some experts may be optimistic about the role of AI in the finance world, others are more pessimistic. Stephanie Link, chief investment strategist at Hightower Advisors, is a bull on AI when it comes to investing in tech and cybersecurity companies. However, she doesn’t think the technology will supplant her junior analysts anytime soon.
Conclusion
The study conducted by researchers at Stanford University and Boston College has shed new light on the potential impact of AI on the finance world. While the results are impressive, there are several challenges associated with implementing this technology, including the need for significant investments in manpower and technological infrastructure. However, experts agree that AI will likely continue to play a larger role in portfolio management, potentially displacing certain types of roles in the process. As deHaan noted, "They’ll always be there," probably just not as many.
