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Transforming FSI

Artificial intelligence + finance = intelligent investment

AI model analyzes mountains of financial data to help market traders make better buy-and-sell calls   

Fund managers and traders could soon be making better informed buy-and-sell market decisions – and bring in higher returns for their investor clients – with the help of artificial intelligence (AI).

China Asset Management Co., Ltd. (China AMC) and Microsoft researchers have developed a new AI model that sifts and analyzes vast amounts of real-time financial data.

China AMC is one that country’s largest investment houses. It serves more than 46,000 institutional clients and 110 million retail investors, with US$153 billion in assets under management.

Ongoing trials of the AI model got underway under real market conditions in China in March. The results have been encouraging to date and well ahead in performance compared with the progress of the market generally or other indexes.

 

“AI is a critical technology in driving financial transformation.”

– Li Yimei, General Manager, China AMC.

This initial success has raised hopes within the company that AI has the potential to  revolutionize decision-making and boost investment performance without changing its existing business and operational modes.

“AI is a critical technology in driving financial transformation. It is of great significance for us to tap into the convergence of AI and financial services,” says Li Yimei, China AMC’s General Manager.

Li Yimei, China AMC’s General Manager

China AMC got together with Microsoft Research Asia (MSRA) through the latter’s “Innovation Partnership” program. Here, AI knowledge and expertise is shared with companies in a range of industries and sectors to help them develop new solutions and drive digital transformation.

In this case, China AMC wanted to introduce AI to the discipline of quantitative investment, which aims to deliver higher returns.

A new way to handle a trusted method

Quantitative investment isn’t new. Put simply, it is a method of analyzing data – like price and volume. For instance, it calculates which stocks to buy or sell and when by using a systemic approach that should be immune from the emotional ups and downs of market sentiment.

The tricky part is collecting the right data from the mountains of information available. Right now, even meticulous quantitative traders may only use a fraction of all the data out there.

Additionally, financial data is notoriously “noisy,” meaning there are many potentially misleading signals that need to be filtered out.

This is where AI comes in. It’s good at dealing with vast amounts of dynamic data in real-time and applying complex logic. With machine learning, China AMC and MSRA developed AI algorithms that use two sophisticated methods to predict the market.

The first is called a “spatio-temporal convolutional neural network.” It identifies patterns in volume-and-price data by estimating what is going on among different variables and isolating important factors to watch.

The second is called a “time-varying attention model.” It compares those factors with what is happening in the market at any given moment. It then combines them in a time-varying way to identify dynamic market trend patterns. This results in an α signal – which is a measure of how well an asset is performing.

 

“We have an adaptive investment formula that is always at its best at any time.”

– Tie-Yan Liu, Assistant Managing Director of MSRA

Importantly, the system’s developers avoided using a learned model approach, which could reinforce data bias – a problem that has been a typical challenge for other AI systems.

Empowering financial professionals to make better decisions

Tie-Yan Liu, Assistant Managing Director of MSRA, explains, “The financial market is highly dynamic. A fixed investment formula faces great challenges when dynamic data is changing all the time.

“Our new AI model can identify several factors in real-time change, and it can extract α signals in a timely way to update the model. This ensures we have an adaptive investment formula that is always at its best at any time.”

Tie-Yan Liu, Assistant Managing Director of MSRA
Tie-Yan Liu, Assistant Managing Director of Microsoft Research Asia.

The result is a more profitable investment strategy called “AI+ Index Enhancement.”

In effect, it is a tool that seasoned traders can use. Combined with their experience and specific domain knowledge, it empowers China AMC’s financial professionals to make better decisions, not to replace them.

AI-based intelligent investment can also help fund managers and traders overcome bias that can be created by people’s personalities or emotions.

Overall it provides a stable reference for financial professionals to judge the market better.

Decisions are made by people with experience

In the end, decisions are made by people with industry experience. AI is meant to augment, not replace, the capabilities of those professionals and to help provide more possibilities and services in the financial sector.

As Zhang Hongtao, Managing Director of AMC and head of China AMC Quantitative Investment Division says, “AI models fit well into our investment strategies at China AMC.

“And, they are also working smoothly with other ‘components’ at China AMC. Without a single change to the business and operation modes, AI is already able to revolutionize the area of intelligent investment.”

TOP IMAGE: China AMC’s headquarters