18 September 2024
Artificial intelligence (AI) has emerged as a transformative force in investment management, promising to revolutionize how firms operate and make decisions. However, despite its potential, a significant barrier stands in the way of full AI integration: the widening AI skills gap. While AI holds the potential to enhance active management, improve scalability, and reduce costs, many firms lack the necessary expertise to capitalize on these advantages. In a compelling blogpost appeared on Enterprising Investor by CFA Institute, Dan Philps, PhD, CFA, explores the dangers and opportunities created by the growing AI skills gap in the investment industry.
Philps asserts that AI will not replace investment managers - but investment managers who successfully incorporate AI will replace those who do not. AI is often surrounded by hype, but at its core, it is a powerful automation tool capable of driving meaningful advancements within the industry. It also has the potential to reinvigorate active management, offering new ways to combine traditional fundamental analysis with quantitative methods. However, many investment firms are lagging behind, with traditional managers often skeptical of AI’s role and quantitative managers exaggerating their use of AI technologies - a practice dubbed “AI washing.”
The true challenge, according to Philps, lies in the severe lack of AI skills across all levels of most investment firms. This skills deficit presents both a significant risk and an extraordinary opportunity. On the one hand, investment managers and asset owners who fail to address this gap may struggle to implement AI effectively or safely. On the other hand, ambitious professionals with the right drive and aptitude can leverage this gap to stand out in the industry.
The AI skills gap presents specific risks for two critical roles in the investment process: manager researchers and investment managers. Manager researchers are responsible for approving or rejecting strategies and must have the skills to critically evaluate AI-driven approaches. Without these skills, they risk either dismissing superior strategies or endorsing flawed ones. Investment managers, in turn, face increasing pressure to demonstrate their use of AI to clients, which could lead to exaggeration or misapplication of AI technologies.
Despite these challenges, the current skills gap also offers a once-in-a-generation opportunity for those willing to learn. The CFA’s Professional Certificate in Data Science, launched in 2023, offers a practical way for investment professionals to close their AI knowledge gap. By developing a deeper understanding of AI, professionals can position themselves at the forefront of the industry’s transformation.
Beyond the immediate risks and opportunities, Philps also explores the broader potential of AI to reshape active management. Historically, active management has been constrained by its subjectivity and scalability limitations, as analysts can only cover a finite number of companies. Quantitative strategies, meanwhile, have largely been factor-based, lacking the nuanced insights provided by bottom-up analysis. AI, however, has the potential to bridge this gap by automating many of the tasks performed by analysts and scaling those processes across a much broader set of companies.
This fusion of active and quantitative strategies, made possible by AI, could revolutionize the way investment firms operate. AI-driven processes could enhance objectivity, reduce costs, and ultimately improve returns. But to realize these benefits, firms must overcome the significant challenge of integrating AI into their strategies—a task that requires not only technical skills but also leadership with a deep understanding of both investment management and AI technologies.
In conclusion, AI is far more than just another technological innovation; it is poised to redefine the future of investment management. The most significant barrier to unlocking its full potential, however, remains the industry’s AI skills gap. Firms that fail to address this critical challenge risk falling behind their more agile competitors. For asset allocators and owners, the key message is clear: ensure that your managers and service providers not only adopt AI but also possess the necessary expertise to do so effectively. For ambitious professionals, the AI skills gap presents a transformative opportunity to distinguish themselves in an evolving landscape.