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Robot brokers aren’t very good

Fund managing that uses AI gets worse returns than humans
Aug 29,2017
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Last March, the Financial Services Commission said it would allow local financial companies to offer their clients investment advice from artificial intelligence programs - instantly dubbed robot advisers. Investors expected a breakthrough in fund management. Higher returns seemed inevitable as artificially intelligent advisers were expected to be using big data analysis and advanced algorithms, the same way that Google’s AlphGo managed to defeat human Go master Lee Se-dol.

Months later, the robots don’t seem to be giving their human counterparts much competition. In fact, the returns on their portfolios weren’t even able to keep pace with the recent rise of Korea’s benchmark Kospi index.

Currently, there are 30 funds managed by robot advisers at nine asset management companies in Korea, according to KG Zeroin, a fund analysis service, and KB Asset Management. 15 funds have been operating over three months but their average rate of return stood at a measly 1.61 percent. During the same period, the Kospi rose by 2.77 percent.

Only three funds out of 15 managed to match or outpace the increase in the index.

The gap between the performances gets even wider over the last six months. The average rate of return for 12 funds that have been operating for longer than half a year stood at 4.41 percent. During that period, the Kospi rose by 13.49 percent.

Robot-managed funds managed to beat funds managed by mere mortals in only one category, and not by very much.

Robot-advisers’ average return over the past six months in investments in local stocks was 14.23 percent while the market average was 13.34 percent. For fund investing in international stocks, robot managers’ six-month average return was 5.61 percent while the market average was nearly double at 11.4 percent.

“Although launched as robot-adviser funds, most of the funds are not that much different from regular algorithm-based trading,” said Jung Kyu-bong, an analyst at Shinyoung Securities. “Only a few firms have the technology to pick and choose certain securities to invest in based on an analysis of various type of big data.”

According to Kim Il-soo, the chief executive of Wizdomain, which has a robot consulting service called Wizbot that analyzes patents held by companies to decide the level of their technology and ultimately their values, most of the funds managed by robot advisers in Korea allocate assets based on similar algorithms. “Most robot advisers do ‘passive management’ [a type of investment strategy in which managers do not invest aggressively to beat the market index] and focus more on risk management than high returns,” explained Kim. When the Kospi plummeted nearly 4 percent this month due to the tensions between the United States and North Korea, funds by robot-advisers fell by less than one percent, a clear sign of their concentration on risk management.

“Two Sigma [an American asset management firm] utilizes technology in which robot managers select securities to invest in by analyzing big data such as satellite photos or product lists on online shopping malls,” explained Hong Yoong-ki, who is in charge of multi-asset solutions at KB Asset Management. “Consumers [in Korea] expected this type of robot-managed funds but the reality in Korea was that we need some improvement in the technology.”

Some analysts say that robot fund managers should be approached as a means to save costs in asset management.

“The forte of robot managers is that customers can receive detailed services such as portfolio management and notifications on external variables at costs cheaper than if [human] fund managers were doing the work,” said Kim Sang Won, director of the smart finance at Daishin Securities. “Customers interested in [services] by robot advisers should consider this cost-saving element rather than actual returns.”


BY CHO HYUN-SOOK [choi.hyungjo@joongang.co.kr]