AI Decoded - Investment innovation with Best Styles

In a world where financial markets are driven by vast and ever-growing amounts of data, the quest for a more robust yet refined equity strategy has led many to turn to Artificial Intelligence (AI) as the solution. However, many AI terms can seem intimidating, and the underlying algorithms are often complex. Drawing on the AllianzGI Systematic Equity team’s extensive experience with AI, we are pleased to introduce a new series that explores the AI techniques we employ while presenting them in clear, accessible terms.

AI has quietly embedded itself into our lives, from YouTube’s translated subtitles to TikTok’s personalized recommendations. Although it made headlines in 2016 when AlphaGo defeated Go champion Lee Sedol, AI still felt distant for most. This perception shifted with ChatGPT’s release in November 2022, capturing the public’s attention as it amassed 1 million users in five days and 100 million within months. The AI momentum hit Wall Street when Nvidia, a key player in AI hardware, saw its stock surge to a record high amid an AI chip frenzy. These events sparked some soul-searching as individuals and businesses began to reconsider what AI could actually achieve for them.

Although popularity of AI has surged in recent years, the Systematic Equity team at Allianz Global Investors has been at the forefront of integrating these techniques into their work. For example, we leverage AI tools like Databricks Assistant and GitHub Copilot to automate documentation and prototyping, significantly accelerating our signal testing. Our transition from on-premises hardware to scalable cloud computing has further boosted flexibility and efficiency, putting cutting-edge AI techniques at our fingertips.

Beyond streamlining workflows, the team has a long-standing history of researching AI-driven signals, as illustrated in the exhibit below. During the past 25 years, from statistical learning to the era of Large Language Models (LLMs), we have continuously advanced in this journey. Consequently, the Systematic Equity team’s flagship strategy, the Best Styles Equity strategy¹, has integrated AI signals for years. Building on this foundation, we also launched an AI-powered Equity Strategy in November 2021, leveraging proprietary AI-driven signals to unlock alpha potential. The commitment to innovation ensures we remain at the forefront of the rapidly changing landscape of investment management.

Today’s rapidly evolving technological landscape offers a variety of advanced techniques. Among the many we have explored and researched, we have identified several promising AI-driven signals, as outlined in Exhibit 2. These signals employ cutting-edge AI methodologies: for example, Earnings Call Sentiment extraction and change detection in Company Filings leverage NLP techniques, while Deep Momentum utilizes Artificial Neural Networks (ANN). These signals help us uncover insights from unstructured data and enhance our investment strategies.

As we continue our journey into AI research, we would like to share our experiences with our investors. To this end, we will be publishing a series of papers to demystify AI techniques and present them in a clear and accessible way. In the upcoming papers, we will explore key methodologies as mentioned above, including Random Forest, NLP, etc.

We hope this series provides valuable insights into both our strategy and the dynamic, ever-evolving field of artificial intelligence.