Harnessing Generative AI for Alternative Asset Investing

Featuring: Raphaelle Granger, Head of Product Strategy, Asset Owners Americas and Mike Srdanovic, Chief AI Architect and Emerging Technologies

As asset owners have increased their allocations to alternative assets, many have been challenged in aggregating an accurate picture of their portfolios. New technology solutions can change that experience.

Alternative asset investing is a key focus for institutional investors, driven by their desire to diversify their portfolios and achieve a premium on investment returns. In what has traditionally been a more operationally manual asset class, new technologies have been moving the needle in the effort to make alternative assets easier to manage and administer for institutional investors of all types and sizes.

Alternative asset investing has been growing rapidly over the past couple of decades with global alternative assets under management (AUM) at about $16.3 trillion at the end of 2023.[1] While the growth trajectory has slowed recently due to rising interest rates, their role in well-diversified investment portfolios continues unabated.

With a greater commitment to alternative investment strategies comes the need for a more complete understanding of the performance, risk exposure and liquidity of such holdings. Emerging technologies can make this easier, facilitating a revolution in alternative asset investing.

Servicing alternative assets today

Asset owners can face challenges in attaining a detailed and accurate view of alternative investments in their portfolios. With little standardization in alternative markets, asset owners and asset service providers are often left to manually piece together a view of an alternative investment portfolio’s composition and performance.

Due to a general lack of readily available, plug-and-play technology, automation of investment records is not typically available to most asset owners. As a result, resources are diverted in the form of many hours of manual work to accurately compile information around alternative investments, where such resources could be better utilized by maximizing time with higher-value strategic tasks.

However, emerging technology applications such as artificial intelligence are transforming the world of alternative asset servicing. For example, machine learning, a subset of artificial intelligence, allows a program to continuously adapt its recognition abilities based on real data. With a variety of uses across many asset owner challenges, machine learning can refine document extraction and data recognition. As asset owners and asset servicers exchange documents, machine learning algorithms become increasingly accurate, automating the exchange of information.

Another emerging technology that’s changing the alternatives space is generative artificial intelligence (Gen AI). While initially intended to streamline routine processes, Gen AI is now expanding to provide more analytical information, which in turn is helping investors in their decision-making. Gen AI use cases are picking up traction as investors recognize its potential to shift the alternative investment landscape.  In a recent Northern Trust-sponsored survey of global asset owners conducted by Alternatives Watch, nearly 78% of allocators believe AI can help their team make better alternative asset investment decisions by digitizing documentation to streamline internal processes.[2] 42% of respondents who said they have used AI in their investment processes have used it for portfolio analysis and modeling.[3]  

How Gen AI is impacting the front-office

Gen AI is evolving from being a tool for back-office clerical tasks to becoming an integral part of the middle and front-office for alternative investing. By improving the analysis of unstructured data to extract valuable insights that were previously difficult to discern, Gen AI is helping to increase efficiency and unlock new opportunities.  

Investment Oversight

Boards require up to date information to make informed decisions, allowing for proper oversight. Gen AI can enhance board and investment committee oversight by providing better analytics and predictive insights, enabling more informed decision-making. It also has the power to change how meetings are documented and analyzed by automatically transcribing conversations and extracting key insights. These advanced capabilities make it easier to prepare comprehensive summaries for board meetings. This is particularly important in the alternatives space because there is a heightened need for more timely and more transparent reporting due to the complexity and risk profile associated with these investments.

Enhanced Investment Research and Due Diligence

Gen AI’s applications for alternative asset servicing have come a long way from early rule-based template documents which required repetitive reprogramming as a document’s structure changed. While today’s AI capability will not eliminate the need for specialized knowledge in data normalization, it allows for higher quality data and reduces human intervention. Gen AI can extract and analyze vast amounts of data, allowing investment teams to spend more time analyzing decisions rather than inputting data.

Gen AI can also synthesis diverse data and provide deeper insights and more comprehensive intelligence. This can lead to more accurate risk assessments, allows for more informed investment decisions to be made and frees up capacity for other tasks.

Portfolio Management and Optimization

Asset owners gain insight into the performance of alternative assets – particularly private market investments – through holdings statements from investment managers. Without the assistance of technology, they are left to manually review these statements to compile a complete picture of investment performance. Developments in AI such as GPT4-Vision and its visual relationship detection can translate human language and extract specific data found within scores of documents. These processes will simply require human supervision, and not constant administration, which again frees up an asset allocator’s time to focus on higher-skilled functions. 

Going further, Gen AI has the capacity to develop models that adjust asset allocations in a timelier manner based on current market conditions and investor preferences. This is particularly useful for alternatives which require more nuanced strategies.

As asset owners commit to increased alternative asset allocations, their portfolio management and administration needs will grow in complexity. Incorporating Gen AI will offer opportunities to effectively navigate these complexities and enhance operational efficiencies.  

Moving the needle on alternative investment decision-making

In a broad context, Gen AI has the potential to enact significant change in the alternative asset investing space. Gen AI can automate the exchange of information, enable complex investment models and analyze alternative investments in a visually rich fashion. Incorporating Gen AI into the process not only enhances efficiency and accuracy but also creates more opportunities for asset owners to maximize their investment decisions.

[1] Preqin | Alternative Assets Data, Solutions and Insights

[2] Alts in the AI Era | Northern Trust

[3] Alts in the AI Era | Northern Trust