Canadian pension plans realizing benefits of artificial intelligence.
By Ed McCarthy
Artificial intelligence (AI) continues to gain traction with Canadian pension plans. A January, 2021 Society of Actuaries white paper “Fintech and the Retirement Savings System,” discussed several areas where AI can benefit plans:
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AI can help investment managers evaluate a wider set of data and evaluate new data more quickly;
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Algorithmic programs allow investment managers to track economic indicators and adjust portfolios automatically in response;
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AI can be used to select and monitor a fund’s portfolio managers.
Wei Xie
Toronto, Ontario-based OPTrust uses machine learning (ML), a form of AI, to enhance decisions for its C$23 billion portfolio, according to Wei Xie, co-head of Multi-Strategy Investments within OpTrust’s Capital Markets Group. In financial markets, different factors drive behavior of price movements at different moments in time, Xie explains. The plan’s ML algorithms work to identify potential inflection points in market behavior that can signal what Xie loosely defines as a regime change.
These inflection points, which can be very subtle, alert the ML strategy that something relevant in the market has changed. The plan’s investment managers use this information to determine if and how they should change their portfolio. “When there is a regime shift, it tells us that something fundamentally has changed in the markets,” Xie explains. “That means our conviction on what we currently hold in our portfolio should be adjusted to reflect that, because an unknown variable has emerged, and we should adjust our risk-taking posture as a function of that.”
“It’s impossible to predict with a hundred percent accuracy, but we’re hoping that these algorithms give us a slight edge in being able to increase our chances at identifying key regime shifts,” says Xie.
Other Canadian pension plans also are moving actively into AI applications. In 2019 Alberta Investment Management Corporation (AIMCo) and Edmonton-based AltaML Inc. created AlphaLayer, a joint venture. According to the AlphaLayer website, the organization “is focused on driving innovations across all areas of the investment management industry from back to front-office by building solutions that drive operational efficiencies, generate innovations in risk management, and create unique sources of investment returns.” Solutions are delivered internally to both AIMCo and the commercial market and the initial work together focused on developing AI for investment management.
“AlphaLayer has deployed nearly two dozen projects over the first two years of operation with a significant number of those projects being integrated within AIMCo,” says Elias Tsiouris, Director Capital Market Operations and Operational Efficiency with AIMCo. The operational efficiency integrations have unlocked time savings, which can be rededicated to higher-value work, error reduction, and quicker overall processes downstream. The work in investment management has included alternative data and trading models that have provided portfolio managers and analysts with new tools to support the investment decision- making process and generate alpha, he adds.
Constraints
AI development is a complex and time-consuming exercise, Tsiouris points out. Many funds do not have the in-house capability, or the mandate, to hire the team of machine learning developers, data scientists and analysts necessary to develop AI solutions. This can become a barrier to proceeding with an AI strategy. “Unfortunately, this barrier may become too daunting for some plans and they may choose to avoid researching opportunities instead of seeking out partners with the capabilities to help them define a path,” he says.
The failure rate for research and development efforts can be high, Xie cautions, so organizations need to have realistic expectations and focus on the areas that will yield the maximum benefit for the effort and resources expended.
Looking Ahead
AI will permeate more and more of plans’ operations and the impact won’t be limited to investment decision-making, says Xie: “There are many ways to apply AI and machine learning to make more efficient operating processes and frameworks.”
To learn more about AI’s role in plans, register for the June 8 CAiP Virtual Forum, Pension Fund Operations: Risk, Due Diligence and Governance, which will include a Fireside Chat, “Artificial Intelligence: New Age of Analytics.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
