Quant meltdown seen as cautionary AI tale, but others cite potential gains

Where some market players anticipate a flood of efficiency gains should a ChatGPT-inspired push make large language models and natural language processing tools ubiquitous in the industry, others see potential challenges.

On the cautionary side, some market veterans wonder how much scope there is for the rise of artificial intelligence to bring about a repeat of the quant meltdown of 2007, when quant managers working off similar investment signals ended up chasing the same stocks — powering a heady rally on the way up but a destabilizing rush for the exits when momentum finally shifted.

"One of the things in the back of everyone's mind is this idea that you can have … the correlation of signals with investment firms starting to make more use of artificial intelligence to extract information and insights," potentially leading everyone to the same place, said Richard Dell, a London-based partner with Mercer and head of equity manager research for the firm globally.

But others see the prospect of such challenges as more a case of old wine in new artificial intelligence bottles.

Competitive pressures are nothing new, said Gary Collier, London-based chief technology officer with Man Group PLC. Generating alpha is a tough business and "you've got to be always aiming to stay ahead of the pack" — scouting for new sources of data, thinking of new models to deal with data, he said.

As of June 30, Man Group reported AUM of $151.7 billion.

Still others see the rise of big data and large language models as just as easily ushering in a period of creativity as conformity – less lemming-like and more, with apologies to Chairman Mao, "let 100 flowers bloom."

For money managers moving now to employ artificial intelligence in pursuit of competitive advantage on the investment side, "your unique selling proposition … is how you use it," said Darren Johnson, executive director and global chief operating officer with London-based Impax Asset Management Group PLC. "You can put your source on this … your interpretation. That's where your innovation comes from, that's where your edge comes from as an organization," he said.

Impax reported $50.4 billion in AUM as of June 30.

Lou D'Ambrosio, a New York-based partner with Goldman Sachs Asset Management and head of the GSAM Value Accelerator team working with the firm's private equity portfolio companies, likewise said he's not losing sleep over the specter of crowded AI-fueled trades, noting the potential for new investment tools to allow money managers to marry their own investment approaches with the power of artificial intelligence.

"The capability now exists to interact with the machine in ways that we've never been able to do, through natural language, and then to train the machine to have a reasoning mindset the way a specific individual or organization or a group of individuals has," said Mr. D'Ambrosio, adding "the thinking power of the machine with that reasoning context will exceed the capability of what the human brain currently can do."

"It will be ubiquitous … but there'll be very different applications of it and everybody will not end up at the same place," he said. "There will be new winners and losers, both in terms of the providers as well as the consumers of the technology," he added.

Likewise for the prospect that growing use of AI-powered tools could limit the scope for money managers to maintain a competitive midterm to long-term advantage on the investing side, money managers see reason for cautious optimism.

The greater the number of managers harnessing the effect of a particular risk factor that's been identified, the more it will come to look like the equity risk premium, but "of course you can enrich it further by additional proprietary enhancements," said Vlad Zdorovtsov, director of global equity research with Acadian Asset Management LLC, a Boston-based quant firm overseeing $100 billion in client assets.

"You can also interact with additional data sets that are richer and then you can kind of squeeze that risk out and you can have the alpha part of it," Mr. Zdorovtsov said.