How Investment Managers Are Tapping Technology To Improve Alpha Generation

Technology has been dramatically changing the world for centuries, with each major wave of advancements bringing a whole new world with it. Technology has also impacted investment management over the decades, although some portfolio managers have been loath to adapt.

However, leading investment managers are continually upgrading their processes by adding new technologies in search of alpha, so no firm can afford to be left behind.

Digital transformation

In its "2023 Investment Management Outlook," the Deloitte Center for Financial Services highlighted ways that technology provides advantages to investment managers who know how to use it. The firm noted that there are multiple stages of digital transformation that range from process improvements to the creation of new operating models.

In investment management, such efforts typically fall somewhere in the middle. Process changes generally occur dramatically through the use of new data sources and analytical capabilities to enable new product development.

Deloitte's research demonstrated that the more comprehensive a project becomes, the leading practices require more hands-on leadership from key executives. The firm explained that higher leadership is beneficial to process transformation due to the need for greater collaboration and coordination across departments.

The results of Deloitte's survey suggest a strong connection between progress on digital transformation and improvements to corporate culture. Eighty percent of the few who said their firm was very far along in its digital transformation also saw their firm's culture strengthening.

Spending on technology

The report also looked at expected changes in spending for the major technology categories. The one significant difference between the spending expectations of investment managers and those of others at the firm was in blockchain and distributed ledger technologies. Twenty-three percent of finance executives expected a large increase in spending on those technologies, compared to only 11% of executives in other parts of the firm.

The rest of the differences were minimal, but they do show that finance executives generally expect larger increases in spending on technology than those in other parts of the firm. The only significant exceptions were cloud computing and storage and cybersecurity, where non-finance executives expected more spending than those in finance.

Generating alpha

Of course, leading investment managers strive to deliver alpha consistently and efficiently. Reinvestments in the firm should focus on improving alpha generation and, by extension, the client experience and operational efficiency.

Deloitte identified artificial intelligence, data acquisition and processing, and data analytics as three of the key technologies capable of directly contributing to alpha generation, although they aren't exclusively used in that capacity. The firm's survey revealed that North American respondents are planning to increase their spending on those technologies more than their European and Asia-Pacific counterparts.

The study also found that respondents who expected a large increase in spending on AI and data analytics had much higher probabilities of significantly better revenue prospects in 2023 compared to those who didn't expect large increases in spending, at 53% for AI and 54% for data analytics.

Advantages via technologies

The firm also reported application to be the connection between implementation of technology and revenue. Many investment managers are applying those technologies to incorporating new datasets into the investment-decision process. They are also using technology to streamline their front-to-back-office integration.

Such developments can give investment managers advantages by enabling them to come to better investment decisions faster because of their access to tighter systems and data integration. Historically, advantages in available information have enabled investment managers to reliably outperform those with access to less information.

Thus, active managers prioritize research and analysis in their quest to gain an information advantage of their competitors. Advanced technology is becoming a more frequently used path to generate that advantage legitimately.

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