Is AI set to reserve the decline of active managed funds?

ISS Market Intelligence's ‘State of the Market: Future of Retail Products’ report, covering the 2023-2027 outlook for long-term funds in the US, estimates that passive funds will account for more than 50% of assets under management by 2027, and active funds share of assets will decline from 53% to 44%. A review of the ten best performing investment strategies over the last decade highlights that four of the top ten strategies were passive strategies i.e., index funds. So you can see why institutions wish they had invested in Bitcoin a decade ago! But, more on that topic in future editions of Digital Bytes….

Best investment strategies in last ten years

Source: This is money

Meanwhile, a fictional fund, selected by using Artificial Intelligence (AI), invested in 36 equites and picked Meta (up 30%), Microsoft (up 20%) and Intel (up 18%). The same portfolio has risen in value by 4.7% (excluding costs) in the last two months compared to the average of UK’s 10 most popular funds, which have collectively lost 0.8% in value over the same time period. Subsequently, could AI-powered funds rekindle interest in actively managed funds and so turn the tide of money that has been attracted to passive index funds? This week, the equity trading platform, Robinhood, announced it is to offer the ability to buy and sell equities, 24/7. This is hot on the heels of Swarm (the world's only regulated DeFi platform) that allows a selection of large cap digitised shares to now be traded 24/7. As more equites and bonds are issued/made available to be traded in a digitised AI format, expect to see the launch of more AI-managed funds employing bots and algorithms. But also expect to see new challenges presented in the way funds are regulated and for those wealth managers who buy and sell funds. For example:

·       digitised funds will offer the ability to have settlement in almost real time, so what time do funds get valued?

·       do coders of AI, not fund managers, become accountable for the funds’ actions?

·       will managers have need to be replaced, as how do existing senior managers oversee their responsibilities (FCA SYSC 4.7 senior management responsibilities for UK-relevant authorised persons) if they are not IT experts?

·       will funds be bought via regulated digital exchanges such as Archax (UK), Six (Switzerland), ADX (Singapore)and Swarm (Germany) as opposed to via fund platforms?

·       will IFAs and wealth mangers need to upgrade/alter their professional indemnity insurance policies?

Will all this mean that digitised funds powered by AI and run on DLT and blockchain-powered platforms reverse the decline in market share of actively managed funds? They certainly look set to offer 24/7 trading, more choice for investors, greater transparency and stronger risk controls, but systems and procedures will need to be upgraded as will staff’s education in asset management firms, wealth managers and regulators. These changes are certain to shake the fund management industry, which PwC estimates will have over $145 trillion of assets by 2025. If this is the case, then this could represent one of the biggest use cases for blockchain technology.