While adopting artificial intelligence (AI) significantly elevates the operational productivity of investment managers, specific strategies are particularly suitable for leveraging AI's capabilities. Litigation finance, public equity, and special situations (special sits) are poised to harvest substantial benefits from AI's precision, speed, and analytical depth.
Litigation Finance and AI Analytics
Litigation finance—a strategy involving funding legal cases in exchange for a portion of the judgment or settlement—presents a unique opportunity to leverage AI. Selecting cases with the highest success potential necessitates an intricate analysis of legal precedents, case facts, recovery analysis, asset tracing, and judge and jury behaviors.
AI, mainly through natural language processing (NLP) and machine learning, can assist an experienced manager with these tasks. AI can sift through vast legal databases to identify patterns or trends correlating with successful outcomes, thereby enhancing selection.
Furthermore, predictive models can assess the potential value of judgments, optimizing the portfolio of cases to fund. By incorporating AI into their due diligence, litigation finance managers can make faster and more informed decisions, reducing the inherent risks and maximizing returns.
Equity Investment: Refining Strategies with AI
AI propels managers beyond traditional analysis in equity investment. By processing vast datasets—including market data, social media sentiment, and real-time economic indicators—AI helps identify undervalued stocks or forecast sectors with growth potential before they become evident to the market.
AI's ability to conduct sophisticated quantitative analyses allows for developing complex trading algorithms to execute high-frequency trades or employ predictive analytics to time the market accurately. For equity investors, leveraging AI means enhanced decision-making and the ability to implement innovative trading strategies that can adapt to market dynamics and withstand tail events.
In addition to quantitative data, the sentiment surrounding a security or sector can significantly influence its price. AI tools adept at NLP can scan news stories, earnings calls, and analyst reports, gauging the general sentiment and uncovering discrepancies between public perception and underlying financial health. This capacity to map sentiment at scale can spotlight companies potentially facing downward pressure.
Special Situations (Special Sits): Navigating Complexity with AI
Special situations investing, characterized by investing in companies facing significant events or transitions such as mergers, acquisitions, or restructurings, demands a deep understanding of the complexities involved. AI can help emerging managers by analyzing historical data of similar scenarios to guide strategy formulation for future trades.
The due diligence process is a critical step in ensuring the viability and sustainability of an investment. Here, AI’s role cannot be overstated. Through natural language processing (NLP), AI can dissect complex documents such as legal filings, annual reports, and ESG metrics to extract pertinent information, assess risks, and uncover potential red flags with unparalleled speed and accuracy. AI can also find connections between bad actors, rogue law firms, or service providers that may present trade opportunities for activist managers.
AI-driven insights provide a foundation upon which special sits investors can build more robust investment theses, identify potential red flags early, and tailor their strategies to mitigate risks and capitalize on opportunities as they emerge.
The Future of AI in the Investment Management Industry
Integrating AI into the investment process for emerging managers heralds a transformative era where precision, speed, and analytical depth redefine traditional strategies. AI's analytical tools in special situations investing illuminate the path through complex scenarios, offering insights that ensure more informed decision-making, risk assessment, and strategy formulation. As AI continues to evolve, its integration into investment strategies promises to enhance operational efficiency and unlock new opportunities for innovation and value creation for emerging managers and institutional investors.
