Disclaimer: This article is for entertainment purposes only and cannot be used for financial advice. Artificial Intelligence is a term that has been gaining considerable traction in recent years and, in its very early days, is already having a big impact on society. Where it is also having a big impact is on the financial sector, and especially on investing. To what extent is Artificial Intelligence changing investing? Advantages First of all, AI allows for more automation. This works through what is known as quantitative trading. This involves creating algorithms that seek out market inefficiencies to take advantage of them. This is done at high speed, allowing for high returns in a short time. Currently, hedge funds in particular make use of this. The use of AI by hedge funds has therefore exploded in recent years. According to a study by Barclay Hedge Fund, more than half of all hedge funds use Artificial Intelligence to achieve higher returns. However, these hedge funds do not achieve more returns directly. The reason is that it is difficult to interpret outcomes of these algorithms. This requires specially trained workers, of which there is currently a shortage. Private investors can also use AI. For instance, websites like ChatGPT are used for investment advice (Investing News Network, 2023). Secondly, Artificial Intelligence enables easier and faster analysis of large data sets. As a result, good investment opportunities are identified faster, allowing for greater returns. Artificial Intelligence also makes it easier to analyse risks. Companies like Deloitte have developed special programmes for this. Next, fraud can be spotted more easily thanks to the advent of Artificial Intelligence. This way, investing remains fairer and investment platforms can more easily guarantee their integrity. For example, if particularly large trades are suddenly made to a bank account or if a disproportionate number of investors go short in a limited period of time, the AI model identifies this as potential fraud. The model then sends a notification to the investment platform and action is taken. Risks Many people are concerned about the impact of AI, including well-known investors including Warren Buffett. He is not optimistic about the future of the technology and calls it a danger to society. He even compares it to the atomic bomb. Despite his concerns, he does invest indirectly in AI. As much as 47% of Berkshire Hathaway consists of Apple shares, and that while Apple is aggressively investing in building products that work with Artificial Intelligence. It also owns $1B worth of Amazon shares (less than 1% of its portfolio). So Warren Buffett sees no future in the technology, but rather in the companies actively implementing it; which is curious to say the least. Another drawback is that the technology can actually be used to commit fraud. The technology can cause identity fraud with the result that investors are hacked. In addition, stock markets can be manipulated. Algorithms created by an AI model contain such a variety of features and functions that traditional algorithms do not have, making it easier to manipulate markets. To prevent this, financial authorities need strict supervision (Ligon, 2023). Another risk is that Artificial Intelligence mainly takes past returns into account. These are no guarantee for the future and can therefore only be used as a tool. Furthermore, AI can lead to discrimination. While this may not be directly related to investing, it is an issue that deserves extra attention. Implementing technology may cause certain people or companies to be excluded, resulting in discrimination. Therefore, it is important not to blindly rely on Artificial Intelligence and use it only as a tool. Conclusion The advent of Artificial Intelligence brings many consequences; not only for society but also for the financial world. It brings many benefits; for instance, large data sets can be more easily analyzed, allowing opportunities to be identified faster. This should ensure higher returns. Unfortunately, this new technology also has drawbacks. For instance, Artificial Intelligence can lead to fraud and can be used to manipulate the market. Furthermore, care must be taken to ensure that it does not lead to discrimination. To ensure that these drawbacks do not take place, it must be strictly supervised by financial authorities. If this happens, the new technology certainly has a future in the world of investing. Furthermore, retail investors should never simply follow financial advice from an AI chat box like ChatGPT.
Hedging against inflation, is it possible?
For Dutch, click here. Current inflation has not escaped anyone’s notice, and among students there is great concern about its height. The first estimate from CBS indicates that inflation in the Netherlands in October was 16.8% based on preliminary figures. This is a slight decrease from September’s inflation rate of 17.1%. Nevertheless, this is an exorbitantly high rate, and assets are going up in smoke. Current inflation The average student, of course, does not have a large amount of assets. The price increases will therefore most likely lead to a higher debt with DUO for a number of students, and in addition, the interest rate on the debt has risen to 0.46%. Inflation is driven by factors beyond an individual’s control. Still, there may be other ways to combat inflation. Some popular ways to preserve purchasing power are examined in this article. Perhaps there are some ways to allay concerns. Gold Holding gold is seen by many investors as a good hedge against inflation. For example, Peter Schiff said “gold will shine in an inflationary environment.” To see if gold is indeed a good way to preserve value, we will look at the results of a few scholarly articles. Ghosh et al. (2004) examined whether gold is an effective inflation hedge. Through an empirical analysis, the article reveals that over a long time horizon gold can indeed act as a hedge against inflation. However, the nominal price of gold is dominated by short-term influences. So over a short time horizon, it can be very detrimental to invest in gold. For example, an investor who would have invested in gold in January in 1982 and held it through December 1999 would have lost 59% in real value. Beckmann and Czudaj (2013) reach the same conclusion in their study that gold can partially hedge inflation in the long run. In particular, consumer prices can be hedged in the long run by investing in gold. In the short term, however, it is not possible for an investor to hedge a portfolio against inflation by investing in gold. The characteristics of an economy during a given period mainly determine how gold responds to inflation. However, the scientific research by Hoang et al. (2016) indicates that gold is not a hedge against inflation in the long run. In the United Kingdom, the United States and India, gold does form a hedge against inflation in the short term. The contradictory result of this article compared to the other articles can be explained by the introduction of nonlinearity. This article proves that the relationship between gold and inflation is not a linear one in a number of countries. For example, a nonlinear relationship is visible in more developed countries, and a linear relationship is visible in developing countries. Thus, gold might be better used with the goal of building a more diversified portfolio. Based on the results of academic articles, I would advise against using gold as a hedge against inflation. The results are contradictory. Moreover, some articles do argue that gold can be used as an inflation hedge in the long run, but this requires a very long time horizon. Real Estate Another way often mentioned to combat inflation is to invest in real estate. An accessible way to invest in this is through a Real Estate Investment Trust (REIT). This is a company that owns real estate and generates income on it. Thus, by purchasing a REIT, it is possible to invest in real estate indirectly. Rubens et al. (1989) examined how a number of portfolios consisting of, among other things, different real estate types fared with respect to inflation. Each portfolio formed at least a partial hedge against inflation when it came to expected inflation. When inflation was unexpected, all portfolios formed no hedge against inflation. Thus, the type of inflation largely determines whether real estate can be used against inflation. Current inflation is high, and it is expected to remain high in the short term. Currently, therefore, real estate could be a way to hedge against inflation provided the expected inflation is similar to the eventual actual inflation. The portfolio consisting of financial assets and residential real estate from the article has the highest Sharpe ratio. Thus, with current expected inflation, it would be most attractive to invest in a REIT that focuses on residential real estate. Another scholarly article by Park et al. (1989) focuses specifically on hedging inflation through REITs. Equities typically perform poorly during times of high inflation. Although REITs have real estate income as an underlying asset, it could be that, like stocks, they still do poorly when there is high inflation. The study finds that REITs actually perform similarly to stocks, and thus are not a good inflation hedge. However, it does show that when distinguishing between expected and unexpected inflation, REITs can be partially used as an inflation hedge when inflation is expected. Thus, this is partially consistent with the findings of Rubens et al. Inflation-related bonds Another way commonly mentioned to hedge against inflation is to invest in inflation-related bonds. Here the coupons and principal are linked to current inflation. This therefore directly protects the bond against inflation. However, an inflation-linked bond does not protect against inflation in the short term. The price of an inflation-linked bond goes down when yields go up, just like a regular bond. When the consumer price index is compared with the yield of inflation-linked bonds over 1-year periods, it is apparent that there is little correlation between the metrics. So in the long run, an inflation-related bond protects against inflation, but not in the short run. Another important aspect of these bonds is that expected inflation is priced into the price of the bond. So an inflation-linked bond protects against unexpected inflation. Therefore, if actual inflation is lower than expected inflation, a negative result is achieved on an inflation-linked bond. So is it possible to hedge against inflation? It is possible to hedge against inflation, but obviously this is
A board year as External Affairs of Asset | Accounting & Finance – Thomas Mols
For Dutch, click here. Who am I? I am Thomas Mols, 22 years old and from Tilburg. A year ago I became active at Asset | Accounting & Finance in my third year of the bachelor International Business Administration. After six months of doing committee work for the Finance Expedition, I became more familiar with A&F. I participated in almost every activity, getting to know a lot of people and making great memories. Besides studying and A&F, I spent my free time in the gym and mostly among other people. Why did I choose the function external? In the third year of my bachelor’s degree, the corona measures got lessened and I felt working life was already approaching. I had the urge to get more out of my college days so I joined A&F. By joining events often, I quickly got to know the association. I always ruled out a board year because I would have to take a break from studying. After a good conversation with some of the board members, I finally saw the value of a board year and decided to apply. What interested me most was the practical work a board member does. After several years of working in theoretical subjects only, I needed a change. In addition, I was unsure of which master’s degree I wanted to pursue, and I thought it would be useful to get a better idea of the possibilities offered by different masters during the year. The external affairs position specifically attracted me the most because you have contact with many companies and can get an inside look at everything. At the same time, I believed I could learn the most with this position. What does it deliver? The most important thing is that you are one board together. Within the board, everyone has a function with delineated responsibilities, so everyone looks at situations with their own perspective and gives their input from there. Decisions are often made together. During a board year you learn to work together very well. Not only within A&F, but also together with the other Asset departments as you will engage in consultation or discussion. You will learn how to identify interests, work and perform under pressure and how to present your opinion or strategy. In addition to the role within the board and within A&F, as external affairs you have a major role towards the outside world. You translate the wishes of companies into the opportunities the association can offer. How you want to position the association as a board is translated by the external to companies and students in the contact you have on a daily basis. So during the board year you learn to communicate in a changing context. By being in contact with so many people, both students and business people, you’re bound to build a huge network. A very useful extra for the future! What do I do as an external? As winter external affairs, you start up the Financial Business Dinner and Finance Expedition committees at the beginning of your year. You make sure the committee members know what their tasks are and guide them through the rest of the year in the work they do. In addition, you are responsible for all social media channels. This means you will help shape the policies that are written by the board during the summer. In the summer, you also help write this policy. In any case, with social media you focus on increasing the reach of the channels. During the year you will occasionally help organize other events and activities. These activities ensure the development you go through in collaborating and communicating. An important task that you perform at different times during the year is doing acquisition for collaborations with companies. The challenge in this is that you have different ways of entering into a conversation. The trick is to get a grip on the interests of the other party, to understand the context and to respond appropriately. As I mentioned earlier, you are also part of a board. You sometimes take over tasks from each other and jump in where necessary. In addition to managing your own department, you form “task forces” with other directors who take on tasks together. These range from organizing Master Experience Days to coming up with new Asset Member Card deals. In organizing events and the regular tasks you have, you don’t have unlimited time. Therefore, it is important that you prioritize and work efficiently. Because of the range of tasks you have, you will learn responsibility and develop time management skills. Conclusion All in all, a board year is a great opportunity to develop yourself and gradually make some amazing memories along the way. And to top it all off you get to help build the greatest study association that Tilburg has to offer!
