AI: Your New Investment Guru or Overzealous Intern?

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As the investment landscape evolves, artificial general intelligence (AGI) is increasingly emerging as a key topic of interest. Unlike the more common generative AI, AGI represents a form of intelligence capable of understanding and performing a wide variety of intellectual tasks at a level comparable to human cognition. Chief investment officers need to understand how AGI can impact the operations of an investment office, including its capabilities, potential benefits, risks, and practical applications.

Let’s start with some definitions. AGI is a type of AI capable of learning, reasoning, and adapting across different domains without requiring retraining for new tasks. This is not to be confused with generative AI or its subsection called large language models. Unlike narrow AI, which excels at specific applications like facial recognition or trading algorithms, AGI theoretically could perform any intellectual task that a human can do. This versatility means that AGI could revolutionize industries, particularly investment management, where decision-making, data processing, and risk assessment are central especially when you factor in time sensitivity.

AGI offers a long list of unique benefits. It can handle multiple tasks, from data analysis to predictive modeling, without requiring specialized training for each new task. Like human intelligence, AGI systems can learn from experiences and apply that knowledge to new situations. The technology has contextual understanding and can process and interpret nuanced information, making it capable of understanding market conditions, regulatory frameworks, and client needs. AGI systems can solve complex problems, potentially optimizing investment strategies across various asset classes. And its natural language interpretation allows it to easily comprehend human language and context based on conversational inputs.

AGI holds the potential to transform how investment offices operate by improving efficiency, accuracy, and the depth of insights available for decision-making. For one, AGI’s ability to process vast amounts of structured and unstructured data positions it to identify unique alpha-generating opportunities. It can analyze market trends, sentiment data, and manager performance, uncovering patterns that human analysts might overlook. For example, AGI can analyze the performance of thousands of investment managers and suggest those with the most promising alpha generation potential based on historical data and market trends.

Investment offices also can use the technology to expand their pipeline of managers. The traditionally slow process of manager selection and onboarding can be streamlined by having AGI continuously scan for new managers, automatically flag negative news, and even recommending suitable replacements.

When negative news surfaces about a fund manager, AGI can instantly suggest alternatives by analyzing past performance, risk profiles, and market conditions. Rather than helping select the right manager, it can help you efficiently eliminate firms that don’t fit your investment mandate. Right now investment offices spend anywhere from 30 to 90 days just on this piece of the manager selection exercise.

AGI also can optimize portfolios by balancing risk and return based on predefined criteria, automatically adjusting positions in response to market changes. Using predictive analytics, AGI can continuously monitor economic indicators and rebalance portfolios to maximize returns while minimizing exposure to risk.

One of AGI’s most valuable contributions is its ability to predict market movements by analyzing historical data and current geopolitical or macroeconomic conditions. The technology can predict the impact of geopolitical events on an investment portfolio and suggest preemptive adjustments to hedge against potential losses. Investment offices can use AGI to run stress tests as events arise and perform real-time scenario analysis on portfolios.

CIOs can use AGI’s advanced algorithms to detect anomalies, unusual patterns in trading activity, and other potential risks in real-time, offering early warnings and proactive mitigation strategies. For example, AGI can prevent fraud by identifying suspicious trading patterns or detecting vulnerabilities in operational processes before they lead to significant financial losses. AGI can also alert you to any changes in the market that could impact your ESG policy specifically or your investment policy statement more broadly.

Investment offices can gain operational efficiency by using AGI to automate routine tasks, such as data entry, report generation, and compliance monitoring — all of which could reduce costs, improve reporting accuracy, and enable faster and more informed decision-making. This allows staffers to focus on more strategic activities and could improve their job-satisfaction.

But of course while AGI offers significant potential, investment offices need to manage challenges and risks. AGI should not be left to make autonomous decisions without human supervision. It is crucial that humans remain involved to ensure that AGI-generated insights align with the organization’s strategy and risk tolerance. One solution is to implement a “human-in-the-loop” system where investment professionals oversee AGI-driven decisions and make final judgments.

CIOs also must ensure that the deployment of AGI complies with regulatory requirements and follows ethical standards, particularly when dealing with sensitive financial data and client portfolios. Investment offices need to establish governance frameworks that monitor AGI’s decision-making processes, ensuring transparency and compliance with regulations. It is also suggested to use closed AI systems where data is not publicly accessible reducing chances of hacking and other cyber attacks.

Investment offices need to navigate the challenges of integrating AGI with existing investment technology. CIOs must carefully evaluate whether their current infrastructure can support the sophisticated data processing and computational requirements of AGI systems. CIOs should collaborate with technology vendors to develop scalable solutions that allow for seamless integration of AGI into their current systems.

To fully leverage AGI’s potential, CIOs must adopt a strategic approach that aligns with their organization’s goals and capabilities. I have actionable steps for CIOs to consider, including evaluating AI and AGI use cases. Begin by identifying areas where AI is already providing value in your investment office, including risk management and compliance, and explore how AGI could enhance these processes.

The potential of AGI can also be unleashed by putting a robust governance framework in place. That will involve establishing guidelines to ensure AGI’s ethical use, compliance with regulations, and alignment with organizational strategy.

Investment offices need to collaborate with AI and technology vendors to ensure AGI systems are scalable, secure, and can be seamlessly integrated into existing infrastructure. CIOs can focus on incremental adoption, starting with integrating AGI into specific tasks, such as manager selection or risk management, and expand its use as the technology matures and demonstrates value.

Making the most of AGI should involve promoting a culture of AGI curiosity and experimentation. If you don’t, in one year’s time, you will be even further behind the technology curve. CIOs also need to get buy-in: AGI integration in the investment office will impact people, processes, and existing technologies. So, be sure to get buy-in from all stakeholders. The sooner the better.

AGI represents a transformative opportunity for investment offices, offering enhanced decision-making, operational efficiency, and the potential for superior returns. By adopting AGI thoughtfully and aligning it with strategic objectives, CIOs can unlock new levels of insight and productivity while maintaining control over risk and regulatory compliance. The future of AGI in the investment office is promising, but its success will depend on how well it is integrated, governed, and aligned with human expertise.

CIOs who act now to evaluate and integrate AGI will be at the forefront of this technological evolution, positioning their investment offices to thrive in an increasingly complex and competitive environment.

Ken Akoundi is the founder of Cordatius, a management consulting firm specializing in transforming the investment offices of long-term investors by enhancing their technology, processes, and operations.

Kartik Uchil is the principal and project manager at Cordatius, with expertise in legacy technology for institutions, vendor selection, and technology integration.

Opinion pieces represent the views of their authors and do not necessarily reflect the views of Institutional Investor.

Ken Akoundi Kartik Uchil