Portfolio managers can be viewed as economic agents that have regularized behavior. Hence, if we can formulate that agent’s behavior. That is, we can mimic their behavior. If that is the case, we should then be able to generate a portfolio with similar returns. This is what is done in the paper, “Mimicking Finance”. The authors in this paper use AI and ML to extract and classify the behavior of economic agents that is predictable from past behavior. The agents may view that their behavior is novel. It is not. A large percentage can be mimicked, with approximately 70% of mutual fund managers’ trade directions predicted. The more history we have about a manager, the more likely we are to predict their behavior. Managers who oversee many funds exhibit greater predictability. But, it has been found that higher ownership leads to less predictability.
So why do we need portfolio managers? We can just develop agents with different characteristics to do the job. There may not be that much special with many managers. This really shows the power of AI within the asset management world. However, we may have to step back with some conclusions.
Interestingly, managers whose behavior is more predictable significantly underperform their peers, and those who are the least predictable do better. If you cannot be typecast with your behavior, or you are changing your behavior, you will do better.
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