Artificial intelligence (AI) will have a significant and complementary role to play in asset management going forward, according to investing guru, Man Group's Pierre Lagrange.
"It's all about seeing how far we can push the machine in terms of taking some of the decision-making on the investment side. There are so many variables that people are looking at to be aggregated into the decision-making so the more you can use a machine, the better it is," explained Lagrange, speaking to CNBC on Tuesday.
Lagrange co-founded discretionary asset fund manager GLG in 1995 and stayed with the firm following its 2010 acquisition for $1.6 billion by the world's largest publicly traded hedge fund, Man Group.
The Belgian financier has recently stepped back from day-to-day portfolio management, partly to oversee the ongoing incorporation of technology into GLG's investment processes.
Fund managers should firstly identify and then focus their efforts on areas where humans' skills are more valuable than those of the machine, according to Lagrange. GLG has spent significant time building algorithms to test different investment functions to determine where humans retain an edge.
"If you look at macro or index decision-making you then become more quantitative but when you look at individual companies, the disaggregation makes it more complicated to be purely quantitative so that's where we want to focus the discretionary input," clarified Lagrange, pointing to research into single equity or credit names as examples of where humans can add value.
"It's the same as the industrial revolution where you're using the machine to enhance your discretionary process," he added, noting that data mining, polling, modelling and managing momentum were examples of where machines have an advantage.
As passive funds continue their steady assault on active managers - Bernstein Research recently predicted that 50 percent of assets under management (AUM) in the U.S. will be passively managed by early 2018, around double the proportion only a decade ago – it will become increasingly important for fund managers to differentiate themselves to justify the fee premium over low-cost indexed funds.
Man Group's recent hiring of William Ferreira as head of machine learning in addition to Lagrange's increased focus on the initiative, demonstrates the British fund management group's belief that AI can provide such a critical differentiator.
Yet such investment does not come cheap, making it ever more difficult for smaller managers to compete, says Lagrange, indicating that this will be another driver of the ongoing trend towards consolidation in the industry.
"A lot of the work that needs to be done requires significant funding…and you need a lot of fundamental R&D (research & development) which means you don't really know if that's going to pay up quickly or not so you need to amortize that over a big structure," he explained, noting that the adoption of technology within asset management, as in other industries, is happening at an ever accelerating pace.
Lagrange anticipates the end game being a barbelled industry structure characterized by a few global behemoths and some small niche players.
"The middle is going to be crowded out, without any doubt. It's not genius thinking - you can see that in retailing, consumer goods, in food products. Being in the middle is just not good news," he concluded.