Better Get Your AI Game On

by Jim Kharouf

In the investment world, it’s no longer just about what you invest in, but the methodology and technology you use to do it. The rise of artificial intelligence and machine learning in the financial markets is touching every aspect and asset class in global markets. And that means alternative investment firms are looking for new and innovative tools that will help provide funds with an edge in the market. Here is AI.

The AI and algo game is nothing new really. A couple decades ago many called it neural networks and neural computing, and that has evolved into today’s version of AI. But what is different today and so disruptive are three elements that were not there in the early days of machine learning: computing power and cloud-based systems, a growing and global population of computer and data scientists and data. Lots of lots of data.

Those three are increasingly working together in the alternative investments markets space, enabling firms to make much more accurate, and potentially, more profitable investments. The AI topic, discussed at Lendit Fintech USA 2018 conference in San Francisco in April, revealed just how integrated it is already and where it is going in the coming months and years. Listen to the full recording HERE.

Panelist, Don Davis, CEO and portfolio manager at Prime Meridian, said it is a major part, perhaps the essential part of the investment management space.

“Artificial Intelligence and machine learning is transformative and its going to transform every industry, including the investment management industry,”  he said. “No matter how smart any of us think we are, modern day artificial intelligence is actually smarter and faster and its has unlimited possibilities. Millions and even billions of data points can be analyzed quickly and very complex ways to produce conclusions with statistical reliability.”

In the marketplace lending and consumer lending sectors, data is still relatively new. In many cases, solid data may only date back about 10 years. But many lending firms are producing more and better data every year.  And with today’s technology and mathematical modeling, that data is quickly becoming more granular and more accurate than ever before. Take data on various professions. In the consumer lending space, firms are drilling down to see not only how various professions do in terms of loan performance, they are actually looking at subtle differences in professional titles. For example, Don Davis, said on the Lendit Fintech event panel that they have noticed significant differences between nurses who fill out an application as “registered nurse” and “RN.”

Others are looking at small business lending in the restaurant business and are now finding valuable data in extremely granular information about restaurants by neighborhood, rather than city or region. Some are taking business sectors such as restaurants and gleaning valuable data about customer demand and potential success or failure for a restaurant from social media sites like Yelp and others. These conceivably could help investors determine what, where and why a specific loan package will perform or not.

Going forward, the data in this space will continue to grow and improve. Gone are the days when firms compare loans from two or three years ago to today, to predict their outcomes. Investment opportunities will be much more up to date and perhaps near real-time as the data streams are improved.

The trend is heading this direction quickly. Many firms are investing heavily in this technology and are looking for the new edge in the markets. It’s a good bet that AI will be part of those firms who are delivering winning strategies.