Discretionary Meets Quantitative Investing in Artificial Intelligence

The advent of artificial intelligence may bridge the gap between the subjectivity of discretionary investing and the rigidity of quantitative investing, according to an article in CFA Institute.

Recent developments in machine learning have created exciting possibilities to combine the two investment philosophies,” the article reports. “Now quantitative investors can find much more intricate and non-linear relationships among the fundamental factors that drive investment returns.” On the other hand, it adds, AI will allow discretionary investors to uncover “and quantify factors that had previously been matters of extremely subjective assessments” by, for example, using social media to gauge a brand’s public perception or online employee reviews to measure company morale.

The article highlights an even more compelling application of AI, saying it is “now realistically possible to create an artificial replica of an actual investment manager, a machine that learns by example and develops its own investment style,” and describes how such a system would be built:

The article concludes: “By predicting investment decisions rather than returns, and by including a team’s subjective assessments into the decision process, we are guaranteed to obtain a large variety of unique investment machines—a prerequisite for the continued vitality and robustness of financial markets everywhere.”