How Investment Managers Are Tapping Technology To Improve Alpha Generation

Technology has been changing the world dramatically for centuries, with each great wave of advancement bringing about a whole new world. Technology has also influenced investment management over the decades, although some portfolio managers have been reluctant to adapt.

However, leading investment managers are constantly upgrading their processes by adding new technology 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 in which technology offers benefits to investment managers who know how to use it. The firm noted that there are several stages of digital transformation ranging 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 has shown that the more comprehensive a project becomes, the leading practices require more hands-on leadership from key managers. The firm explained that senior leadership is beneficial in processing transformation due to the need for greater collaboration and coordination across departments.

The results of Deloitte’s survey indicate a strong link between progress with 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 strengthen.

Spend 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 that technology, compared to only 11% of executives in other parts of the firm.

The rest of the differences were minimal, but it does show that finance managers generally expect greater increases in spending on technology than those in other parts of the firm. The only notable exceptions were cloud computing and storage and cybersecurity, where non-financial executives expected more spending than those in finance.

Generate 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 customer experience and operational efficiency.

Deloitte has identified artificial intelligence, data acquisition and processing, and data analytics as three of the key technologies that can directly contribute to alpha generation, although they are not used exclusively in that capacity. The firm’s survey revealed that North American respondents plan to increase their spending on that technology 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 odds of significantly better revenue prospects in 2023 compared to those who did not expect large increases in spending, at 53 % for AI and 54% for data analytics.

Benefits through technology

The firm also reported that application is the link between technology implementation and revenue. Many investment managers are applying those technologies to incorporate new data sets into the investment decision process. They also use technology to streamline their front-to-back office integration.

Such developments can give investment managers advantages by enabling them to arrive at better investment decisions faster due to 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.

Active managers therefore prioritize research and analysis in their quest to gain an informational advantage over their competitors. Advanced technology is becoming a more frequently used path to legitimately generate that benefit.