The AI-powered future of alternative investing

The technology might have limited success in public markets, but it has significant potential for the private market

The AI-powered future of alternative investing

Within the world of finance, the disruptive and productivity-enhancing potential of technology has yet to be fully realized — and that’s especially true for alternative investments.

That’s according to eFront, an alternative investment management software and services provider and specialized business unit within BlackRock.

In a paper titled AI²: Alternative Investment Meets Artificial Intelligence, the company argued that AI has the potential to make a difference in private markets despite its struggles with highly transparent commodity and listed trading markets.

“[F]inding an edge in private markets is often about exploiting information asymmetries,” the report said. “The lack of data underlying the models of decision-making is a key challenge, and opportunity lies in the huge amount of information available in repositories of documents, news and on the Web.”

Such non-traditional sources of information, the report explained, can be tapped effectively with the use of AI technology. That requires extracting data into a digital and structured format, which the report explained is being done in three steps:

  • Bringing complex, diverse, and often content-rich data sources — such as scanned documents, emails, and social media content — into a readable text through AI functions such as Computer Vision and Automated Speech Recognition (ASR);
  • Using Natural Language Processing (NLP) technology to determine the meaning of the content and extract semantic information; and
  • Leveraging Machine Learning algorithms to classify information, discover patterns and relationships between different information types, and extrapolate or predict future or out-of-sample values.

“Machine Learning technology is also used to improve the relevance of search results,” the report added.

Using a two-dimensional scoring framework — one dimension gauges the possibility of developing a parsimonious model of a complex task that does not require human intervention, while the other assesses the availability and accessibility of information needed for the model — the report identified different areas of private-market investing that may benefit from the use of AI.

When it comes to indirect investing in alternatives, the report noted significant potential for AI in areas such as reporting data collection; cash flow forecasting and liquidity; private market program definition; and manager selection.

As for direct investment in alternatives, AI can play a significant role in investment strategy definition; investor reporting; fund administration and operations management; and deal sourcing and due diligence, among other activities.

Still, it may be a while before participants in the alternative investment space fully embrace and maximize their use of AI. Citing a recent survey from EY, the eFront report said that 74% of private equity managers do not expect to use the technology; among hedge fund managers, however, just 40% still hold that expectation.

“As AI evolves, the potential for it to disrupt and enhance fundamental aspects of private market investment is rising,” the report said.


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