In a 1962 collection of short stories, sci-fi sage Arthur C Clarke postulated his third law, that “any sufficiently advanced technology is indistinguishable from magic”.
Now, as we push through the second decade of the 21st century and into a future seemingly set up for AI, Clarke’s law appears more apt than ever.
Through the ‘magic’ of machines we now have the ability to communicate more or less instantly in any language we choose.1 Our cars have become self-steering. Our students’ essays write themselves. Code is self-correcting. AI maps the stars, spots cancers, zaps weeds.
In the world of entertainment and leisure, AI determines our viewing preferences, chooses our music for us and helps decide our holiday destinations and how much we pay for them. It even translates ancient Akkadian cuneiform tablets for us.
Whether in the field of academia, medicine, agriculture, the arts or travel – and whether we’re aware of it or not – we already live in a brave new world of AI augmentation.
Truly, our abilities as humans have been elevated beyond the wildest dreams of even the most forward-thinking of the sci-fi writers of yesteryear.
But what of the world of finance? What of the elusive search for alpha, balanced portfolios, and minimal drawdown? Has this world, too, been enveloped in the warm embrace of the algorithm?
In this report we aim to answer three core questions that could determine the fate of our species (or at least our performance as asset managers):
- Is AI investable?
- How should asset managers use AI?
- What are the second-order effects of AI for society?
As in previous Spectrum reports, our aim has been to tap the expertise from across Federated Hermes, with input from as broad a demographic as possible. Hence, we have included the views of our equity, private markets and credit teams – but we’ve also asked our technology leads for their input. For the first time, also – and showcasing our global capabilities – we include the views of our US-based investment teams.
We hope you enjoy this report.
Spectrum Q3: AI in asset management
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1 In the HitchHiker’s Guide to the Galaxy, the ‘Babelfish’, inserted into an ear, was the solution to multilingual complexity. Today, little more than four decades after the book’s publication, google translate does the job.
