$112B Nordic funds reject black box mysteries behind AI

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(Bloomberg) -- Some of the biggest investors in one of the world’s most technologically advanced corners don’t want robots to replace people when it comes to managing money.

Ilmarinen and Varma of Finland, which oversee a combined 91.2 billion euros ($112 billion) in pension assets, say artificial intelligence just isn’t sophisticated enough to replicate the complex, forward-looking analysis that humans are capable of.

The funds singled out so-called black boxes as a key hurdle to accepting AI for investment solutions. The model -- information goes in, results come out and no one knows what goes on between those two points -- is “intolerable for the human mind in the long term,” said Kari Vatanen, head of cross assets and allocation at Varma Mutual Pension Insurance Co. “People inherently need to feel in control.”

Vatanen also questioned the kind of patterns that AI might fall into. Using the technology “leads to excess optimization, tilting the model toward realized history, and then there is no visibility to what the black box has done,” Vatanen said in an interview in Helsinki. “I think that’s a problem.”

Annika Ekman, head of direct equity investments at Ilmarinen Mutual Pension Insurance Co., says money managers should be able to explain the thinking behind investment decisions, if they expect clients to pay for the service. Using a black box makes that impossible.

“Typically clients want to know what the strategy is and want to understand why they pay management fees for the decision making,” she said. And “there’s still a disclaimer: the future can be different than history.”

Both Ilmarinen and Varma use quant strategies instead of AI. Varma has constructed factor-based strategies for alternative risk premia portfolios. Some of the portfolios are based on investment banks’ models and have been tailored to Varma’s needs for trading derivatives, plain vanilla options, futures and forwards in various asset classes. Ilmarinen uses its own quant strategies based on earnings data.

To be sure, investors are curious about AI applications, said Eelis Hein, the chief investment officer at FIM. The asset manager offers the Nordic region’s first fund based on AI, using a self-learning algorithm to pick stocks and decide portfolio weights.

FIM AI’s capital has risen 160 percent to about 29 million euros since its Nov. 20 start. Most of that comes from allocations made by FIM, but the increase also reflects retail investors actively directing money into AI investment.

Read more on FIM’s ‘Warren in a box’ picking stocks for first Nordic AI fund

Hein says FIM’s model is “unique” in that investors get a “ready portfolio” based on the inputs fed into the system. “While it’s people who build the systems, they don’t interfere with the stock selection,” he said in an interview. “It eliminates human vacillations.”

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