The ability of investment managers to leverage artificial intelligence (AI) is becoming a key consideration for firms due to the widely held view that this technology has significant potential in underpinning future growth.
While asset managers are turning to newly developed AI technologies in the hope that they will bring improvements across a range of business processes, a recent examination by the European Securities and Markets Authority (ESMA) suggests that few EU funds have deeply overhauled their investment strategies as a result – at least based on entities’ own assessment and disclosure documents.
The findings are consistent with existing evidence suggesting that asset managers use new AI tools primarily to support human-driven investment decisions. For instance, generative AI can upgrade portfolio management by improving structured and unstructured data analysis, supporting analysts with coding and enhancing the capacity to detect and utilize market signals.
“Investment funds that promote their use of AI still represent a minor share of the industry, with their number having peaked in 2023. These funds typically aim to integrate AI into systematic investment strategies, but have not delivered significantly higher or lower performance and have had mixed success among investors, experiencing outflows in recent periods. Instead, asset managers use generative AI and tools based on large language models primarily to support human-driven investment decisions,” ESMA wrote.
Meanwhile, elements of predictive machine learning (ML) have long been deployed as part of quantitative investment strategies but are not necessarily always advertised as AI. Notwithstanding this somewhat subdued promotion of AI by funds, depending on the trajectory of its penetration in investment management, new forms of risk to investor protection and financial stability may arise in the future, tied to third-party dependencies and service provider concentration, cyber threats, model and data governance, and increased market correlations.
When looking at how financial markets are strategizing investment in the sector, the marked diversity in the composition of AI-focused indices is suggestive of the debated nature of AI’s economic impact and the differing opinions on which companies stand to benefit most from AI advancements. Against a backdrop of a strong market rally, the portfolios of EU funds have tilted towards AI-focused equities, increasing their exposure to a small group of leading technology companies but also to a broader range of firms that contribute to AI development and adoption.
While this trend indicates a growing recognition of the transformative potential of AI and its role in driving innovation and technological growth, this increased concentration of investment in a specific sector, particularly in a limited number of firms with potentially correlated outcomes, may amplify systemic vulnerabilities.
Given the increasing weight allocated to AI-related companies, a sector-specific downturn could have broader implications and knock-on effects. Against this background, exposure in less liquid segments – such as the debt and private equity markets – warrants particular attention. The growing interconnectedness of AI-related firms with broader economic activities further elevates these risks, underscoring the need for the ongoing monitoring of investment trends in AI-related companies, as the sector’s rapid growth continues to reshape the composition and risk profile of equity fund portfolios.