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HSBC counting on AI to give investors an edge

HSBC Holdings has put artificial intelligence to a novel use: It’s using different forms of AI to analyze data, choose assets in which to invest, and rebalance the asset allocation weekly for an index called AiMAX, which it launched last week.

AiMAX is geared toward clients of HSBC’s wealth businesses where it can be accessed through HSBC structured products as well as insurance and fund vehicles offered by third-party distribution partners. The underlying technology, a combination of the AI and discovery built into IBM Watson and AI modeling software developed by EquBot, can analyze a wide range of data sets, including satellite images of farm crops, shipping containers in the ocean and foot traffic patterns at shopping malls, alongside more traditional data sources like economic reports, news feeds and social media posts to make investment decisions.

HSBC hopes its AI-driven products will deliver better performance to clients.

“We’re trying to offer better indexes with better investment performance, which helps investors grow wealth and save for retirement,” said Dave Odenath, head of quantitative investment solutions for Americas at HSBC, which is based in London and has $2.918 billion of assets. “AI is doing the job a team of analysts would have historically had to do. Being able to leverage that technology and plug it into some of our strategies allows us to do more with less.”

It’s the latest example of a growing trend in which financial services firm deploy AI to do or to enhance work normally done by humans.

“What’s great about this technology is it has the ability to crawl anything and everything in the public domain,” Odenath said. “So things like social media that potentially have had an impact on the markets are covered by the AI. The system’s ability to read social media gives it a bit of alpha on the sentiment.”

AiMAX, its creators say, can simulate the work of a large team of global market analysts and traders to come up with market insights that can be used in creating and rebalancing investment portfolios. Principles of modern portfolio theory are combined with predictions generated by AI. The AI software rebalances portfolios every week by following a three-step process. First it provides forecasts based on data. Then AiMAX tests each possible combination of the 15 investable asset classes. Then it selects the portfolio likely to generate the highest return.

“The AI forecasts determine the asset allocation for AiMAX and the individual equities for AiPEX going into the index portfolios,” Odenath said.

Some hedge funds, including Renaissance Technologies in East Setauket, N.Y., which has recruited IBM Watson engineers, use AI in their investment decisions. HSBC is the first company to create AI-driven indices.

HSBC first did this with an AI-driven stock market index called AiPEX it launched in August 2019. According to HSBC, the AiPEX Total Return Index outperformed the S&P 500 Total Return Index by 7.60% in…

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