Discover How a Major Global Investor Utilizes AI to Optimize Their Trading Strategy for Higher Profits with Reduced Activity

 Discover How a Major Global Investor Utilizes AI to Optimize Their Trading Strategy for Higher Profits with Reduced Activity

Norges Bank Investment Management, a renowned investment entity responsible for managing over $1 trillion in assets, has unveiled its employment of AI to achieve exceptional returns. Surprisingly, the fund's strategy revolves around utilizing AI to adopt a slower and less frequent trading approach, deviating from the prevailing trend. While Wall Street firms eagerly embrace AI to gain speed, cost savings, and a competitive edge, Norges Bank Investment Management stands on the other side of the Atlantic, leveraging AI to introduce a deliberate deceleration.

As the largest single owner in global stock markets, with investments spanning more than 9,000 companies, the Norwegian oil fund manages a staggering $1.3 trillion. In a recent video, Jon Egil Strand, a portfolio manager in Equity Trading and Transition, shed light on how AI has already sparked fundamental changes in the fund's trading practices. By adopting this technology, Norges Bank Investment Management aims to optimize its investment strategy and generate superior results.

Strand's team holds the responsibility of allocating the fund's inflows into stocks, aiming to achieve broad market exposure by purchasing a diverse range of assets. Given the substantial influx of funds received in recent years, their buying activities have reached considerable levels.

In a video presentation, Strand candidly acknowledges the need for self-evaluation, posing the question, "Are we truly proficient in our roles here?" To their realization, the answer was somewhat inconvenient—there was room for improvement.

In response, the fund developed an AI tool designed to evaluate every individual stock in their portfolio. The tool revolves around a crucial inquiry: "Is this stock suitable for short-term inclusion in my portfolio?"

The tool considers various factors such as valuation, margins, revenue, trading volume, and volatility. Each stock is assigned a score, with the most favorable options highlighted in green and the least favorable marked in red. This comprehensive evaluation aids in the decision-making process, enabling the team to make informed choices regarding stock selection.

Due to NBIM's strategy of acquiring a diversified portfolio, it is inevitable that both stocks highlighted in green and those marked in red will be purchased. However, Strand's team effectively utilizes the AI tool to determine the timing of each purchase, prioritizing the acquisition of green stocks initially and deferring the purchase of red stocks for a later time.

Strand highlights the significant impact this approach has had, stating, "That has generated meaningful P&L for us." By strategically implementing the tool, NBIM can optimize their trading decisions and enhance their overall profitability.

Additionally, the AI tool addresses another crucial challenge faced by NBIM. As a major investor, their market activities can significantly influence prices. Rapid buying can drive prices up, while hasty selling can push prices down, resulting in substantial costs for the fund.

To mitigate this, NBIM leverages the AI tool not only to determine the order of stock purchases but also to identify stocks that can be acquired more gradually. These stocks, often situated in the middle range, have a lesser impact on NBIM's overall performance.

While many institutions and hedge funds use AI and machines to accelerate their trading operations, NBIM takes a different approach. They utilize AI to deliberately slow down their investment activities. Strand emphasizes their distinctive strategy, stating, "I want to play our game, where we start with our needs, our characteristics, what makes sense for us."

The full video can be watched below.