With a fresh injection of capital from East West Bancorp, Jason Hsu’s Rayliant Global Advisors has a new goal: To expand its investment research capabilities by using artificial intelligence tools.
East West Bancorp, which owns East West Bank, the largest independent bank headquartered in Southern California, made a non-controlling equity investment in Rayliant last month. Hsu, who became the chief economist of the bank, will help grow and improve the investment management business, which he will continue to run. Hsu, the former co-founder of Research Affiliates, started Rayliant in 2016.
In an interview with Institutional Investor, Hsu said his firm is always looking for capital to grow the quantitative and fundamental capabilities of its researchers. “Investment is a very competitive game,” he said. With the new capital from East West Bancorp, “we are adding more people in using AI as a way to construct portfolios, forecast returns, and forecast business cycles,” he added. Rayliant’s investment strategies use insights from behavioral finance, data science, and local market expertise.
Hsu’s decision to bolster his team’s AI capabilities comes at a time when investment managers are rapidly embracing machine learning techniques, a trend accelerated by the rise of Microsoft-backed chatbot ChatGPT. For example, hedge fund AQR has been experimenting with ChatGPT-like large language models to improve returns. PanAgora has been exploring the capacity of AI tools to help win mandates. Bloomberg has developed its own large language model, BloombergGPT, to enhance natural language processing tasks.
When adopting AI, it’s important to understand how to effectively incorporate the tools into investment strategies, according to Hsu.
“Everyone who’s using AI benefits from the vast library of tools,” Hsu said. “The masters know what algorithms to use….What problems are you trying to solve? What is the nature of the data set that you are accessing and trying to analyze? What is appropriate given the structure of the data? That’s where the art of the mastery sits.”
Rayliant will use AI for research on listed stocks in both developed and emerging markets, said Hsu. Rayliant’s founder is bullish on emerging markets, particularly China.
Emerging markets “are probably at the cyclical bottom in terms of price,” he said. “They are very cheap from a long-term valuation perspective…certainly with China, you are now earning a massive risk premium.”
But Hsu said AI tools need to be used differently when analyzing stocks in developed versus emerging economies. The stock market in China, for example, is dominated by retail investors, making it far less efficient than in the U.S. Professional institutional investors can use AI tools to exploit the inefficiencies and find patterns more easily than in developed markets, he argued. But he pointed out that similar to many emerging economies, the Chinese market also suffers from a scarcity of data. That can complicate the process of analyzing stocks using AI tools, which rely on having access to data sets.
“In the U.S., there’s less opportunity to eke out an advantage [due to high market efficiency], but you are more likely to get an advantage because there’s more data,” Hsu said. “These are both equities markets, but the problems you are trying to solve are a little different.”
