Reinventing Mutual Investing with AI

By Fintech Circle

Asset Management today is built upon the infrastructure of ‘pooling’. The simple presumption of cramming masses into a single model, each trying to derive an individual future from it. Trust in asset management has never been lower, herding patterns are accelerating from the daily trading volumes of huge index products.

Today the optical value of Exchange Traded Funds (ETFs) is little more than a blunt question of cost. A huge mistake but one being driven by the index clandestines, misguided academics and pundits. The result of outdated index construction producing vast uncontrolled open-ended structures to funnel capital into controlled closed-ended securities, a recipe for Minsky-like bubbles, an index anomaly and a missed opportunity for ETF.

Instead fully dematerialised fund structures are the future. Evolving “Direct Investing”; I set out ‘ETF 2.0’ in my lecture for Fintech Circle Institute. A complete rethink. In 2.0 investors will have AI-managed individual pathways, cross-matching assets for expected return, risk, time horizon and maturity, investors trade through Megablocks within the ETF, fully dematerialised, frictionless trading between investors.AI continuously checking the asset pathway, individual pathway and block pathway.

Moving us away from a one-basket-fits-all mentality. Investors can interact, commingling wisdom of the crowd and social networks, whilst collapsing custody and clearing costs. The Megablock becomes a centralised clearing agent for all investors and trades within the ETF allowing; AI-managed straight-through-processing (STP) and delivery-versus-payment (DVP), investors still benefit from novation, fully dematerialised fungible assets and economies of scale but now individual trades are matched first inside the ETF not simply pooled and traded onto the market.

The concept of cash matching individual investors is itself well supported by liability driven investing. Everyone shares in the success of ETF 2.0, proportional to the assets and returns weighted to their individual life journeys.