As we stand here in early 2024, it's clear that the application of artificial intelligence to financial markets has gone through a massive revolution compared to just a year ago. 2023 saw some interesting applications of AI start to take hold, but 2024 has seen a tidal wave of adoption and disruption sweep across the entire financial services industry. From hedge funds to banks, exchanges to fintech startups, AI is now deeply embedded into almost every nook and cranny of global financial markets.
In 2023, we saw the first hedge funds start to use large language models like GPT-3 and more specialized financial AI models to generate investment reports, conduct due diligence on companies, and even generate some basic trading strategies. However, these applications were relatively rudimentary and limited compared to what would follow just a year later.
The Real AI Arms Race Kicked Off in 2024
What kicked the 2024 AI revolution in finance into an entirely new gear was the introduction of more advanced large language models with multi-modal capabilities that could understand diverse data inputs like text, images, videos, and data tables. This new AI was also combined with vastly more powerful reasoning, coding, and mathematical skills that allowed it to build extremely complex models.
Leading financial firms quickly realized that having access to this new breed of general intelligence AI could provide a massive competitive advantage in an industry where being even a tiny step ahead of the competition is worth billions. This sparked a frantic AI arms race as funds raced to acquire the best AI technology and the key personnel to build production-grade AI systems customized for finance.
Virtually every major player, from huge institutions like BlackRock, JP Morgan, and Goldman Sachs to upstart AI-first hedge funds and quant shops doubled or tripled their AI budgets and went on hiring sprees for AI talent that has been dubbed the "AI Draft" of finance's best and brightest technical minds.
Billion Dollar AI Hedge Funds Ascendant
One of the biggest stories of 2024 so far has been the astronomical rise of a new breed of pure AI-driven hedge funds that completely disrupted the traditional investment landscape. These agile funds built from the ground up around large language models and dense neural networks were able to ingest and process a firehose of diverse data far exceeding what any human could consume.
They developed entirely novel trading strategies by combining the multi-modal reasoning of the new AI with advanced models trained on massive datasets of financial data, news, SEC filings, social media, and more. A number of these pure AI funds like Skynet Capital and DeepMind Money racked up staggering returns of over 100% seemingly out of nowhere and instantly became some of the most successful launches in hedge fund history.
Traditional titans of finance were caught completely flat-footed as these AI upstarts rapidly grew assets under management by tens of billions using novel, AI-driven approaches that gave them an information advantage by processing and modeling entirely new data sources traditional funds simply couldn't access or understand.
Banks Turn to AI for Consumer Finance
While hedge funds and asset managers grabbed the AI headlines, some of the biggest AI shifts so far in 2024 come in consumer banking and retail finance as lenders and fintechs scrambled to roll out personalized, AI-driven services to customers.
The largest banks and fintech lenders began deploying AI that could understand an individual's full financial picture and circumstances by being trained on data like income statements, spending habits, employment status, news about their employer, social media activity, investable assets, tax filings, and much more.
With this multi-modal understanding, banks utilized large language models and other AI to provide individually customized financial advice, automated investing services, tax optimization, tailored mortgages, customized lines of credit, and personalized ways to cut costs or increase savings. Banks found consumers placed immense trust in AI-generated advice as it was bespoke for their situation and provided explanations in easy-to-understand natural language.
Beyond just banks, startups and established fintech players made huge strides with AI-powered fintechs for areas like lending decisions, personal financial planning, real estate purchases, insurance plan selection, and more. Big winners were companies that could leverage the combination of specific domain knowledge and advanced AI to provide more personalized experiences tuned to individuals.
AI Also Powers Operational Disruption
AI hasn't just disrupted customer-facing products and investment strategies but also automated back-office processes and everyday operations at many financial firms. By combining large language models with custom internal datasets, firms deployed AI to intelligently draft legal contracts, automate significant pieces of due diligence, conduct audits, handle customer service queries, optimize back-office workflows, and more.
Virtually every major institution had a centralized AI hub or "brain" constantly being updated to build an ever-growing institutional knowledge base that encapsulated firm policies, procedures, historical knowledge, and decision patterns. Staff were able to submit queries to the AI across business units to instantly access relevant information or have the AI generate customized reports and analysis, radically accelerating work streams.
While AI promised immense cost-savings through automation, its biggest impact may have been on employee productivity by making information and analysis instantaneously accessible and consumable across the enterprise.
AI Goes Multi-Lingual for Global Finance
Another major AI trend taking shape in 2024 is the rise of multi-lingual AI support for global financial institutions. As firms rush to implement AI across their operations, they quickly discover many of the best AI models are limited by supporting only English.
This prompted a secondary wave of AI initiatives to develop "multi-lingual AI" that could understand and communicate in all of the world's major languages and even less commonly used languages for specific geographic markets.
With traders, analysts, lawyers, bankers, and investors able to naturally communicate with AI in their native language, it opened the door for deploying advanced AI capabilities to every corner of a firm's global operations rather than just English-speaking hubs. This leveled the playing field by giving all employees and customers access to AI-powered services rather than leaving many regions behind.
Regulatory Headaches Emerge Over AI Risks
Of course, not everything around the AI shakeup in 2024 is celebrated across the financial industry and beyond. As AI capabilities explode in scope and scale, serious questions are emerging about the unforeseen risks of these powerful systems and the need for new governance to oversee them.
A few high-profile cases involving hedge funds allegedly using AI to engage in market manipulation through disseminating rumors or misinformation sparked alarm among regulators. There were also issues raised around AI-generated investment advice having inherent conflicts or blindspots that could harm individual investors and employees of major banks making investment decisions based on potentially flawed AI research.
A major incident involving supposedly "air-gapped" models for a large asset manager being compromised and leaking sensitive trading algorithms caused an industry-wide scare over AI security models. More philosophical quandaries spawned debates around issues of bias, privacy, and the inscrutability of how some AI models arrived at decisions impacting portfolios worth trillions.
At any time, government agencies like the SEC, financial industry self-regulatory groups, and even international bodies like the World Bank could quickly mobilize to establish new legal frameworks and guidelines around the use of AI in finance. The primary goals might be around establishing clear rules around transparency, auditing capabilities, and guardrails to prevent misuse of AI that could destabilize markets or lead to systemic risks building up unnoticed.
While most see the need for smart AI governance, the industry clashes over how heavy a hand regulators should take that could stifle innovation or create imbalances favoring incumbents over nimbler startups. The debates around managing AI risk and capture are just getting started in 2024 with consensus still very elusive.
Looking Ahead into 2025 and Beyond
As we look ahead, most prognosticators expect the AI boom in finance to go to even more meta and extreme levels. The leading AI pioneers are already working on models with vastly more advanced reasoning and predictive capabilities around specific domains like legal contracts, investment research, regulation, and more.
It’s early to speculate, but If 2024 sees general language AIs just starting to gain traction, the next few years might be poised to give rise to ultra-specialized AI "savants" that can match or exceed human-level expertise and capabilities across every finance sub-domain. This could increase the speed and scope of automation, optimization, and data-driven strategies by an order of magnitude.
There's also increasing buzz around the possibility of scaling AI to operate relatively autonomously with diminishing human oversight, raising immense ethical questions over sovereignty and control. It's still uncertain whether AI will ultimately be more of an augmentation tool to empower humans or a path toward truly autonomous, self-directed artificial general intelligence.
Regardless of what the future holds, there's no question that 2024 is starting to feel like the year AI firmly planted itself as the prime disruptor and competitive battleground shaping the future of global finance at its very core. Just a year ago, most of these current impacts were unfathomable even to the leading experts. What new realities will emerge in the next 365 days is perhaps the biggest trillion-dollar question facing the entire industry.
