Qraft and LG AI Research Partner for Innovative AI ETF
Unveiling the Role of AI-Powered Strategies in a Shifting Market Landscape
In recent years, the dominance of passive investment strategies has overshadowed the once-prevalent practice of active investing[1]. The persistent challenges posed by low inflation and interest rates have made it increasingly difficult for fund managers to surpass benchmark returns after accounting for fees. However, the dynamic shifts in the market landscape, catalyzed by the pandemic and subsequent fiscal stimulus, have reignited the prominence of active management. Flows into actively managed ETFs accounted for 25% and 30% of both yearly and quarterly (Q3) 2023 AUM flow[2].
Amidst this changing environment, the Federal Reserve's swift response to inflation through one of the fastest interest rate hikes in recent history has added another layer of complexity. The United States markets, still navigating the effects of this economic shift, face potential hurdles in achieving returns comparable to those of the past over the next decade. This scenario has prompted a reassessment of the value proposition of active management.
Fortunately, the convergence of extensive data availability and advancements in artificial intelligence (AI) has ushered in a new era of innovation in active investment strategies. Illustrating this evolution is the LG-Qraft AI-Powered Large Cap Core ETF (LQAI), the latest addition to the actively managed ETF landscape. This fund leverages AI algorithms to dynamically select securities for its portfolio, representing a significant leap forward in investment methodology.
AI Investment: LG AI Research collaborates with Qraft Technologies
While notable companies like Open AI and Nvidia have taken center stage in the realm of AI, there is often limited insight into how corporations incorporate AI across their diverse business lines. LG AI Research, an integral arm of the LG Group, has been at the forefront of developing AI technologies for its affiliate companies. This spans from proprietary language models[3] to time series forecasting for critical materials used in their products.
Building on the success of its time series model, LG AI Research extended its reach into financial markets, participating and excelling in the M6 financial forecasting competition sponsored by Google and Meta. Buoyed by this success, LG AI Research strategically aligned with Qraft Technologies, a recognized leader in AI-powered investment solutions boasting a portfolio of five AI-powered ETFs. The collaboration seamlessly combined Qraft's market expertise with LG AI Research's robust deep learning forecasting models as well as natural language processing abilities through large language models, creating a natural synergy that sets the stage for new advancements in active investment strategies.
By utilizing LG AI Research’s large language model called EXAONE, unstructured data such as real time news and analyst reports can be used as a key component in the forecasting process to potentially further enhance the overall accuracy of the model’s selections. Furthermore, this large language model has the ability to provide qualitative context on the forecasting decisions that it’s made which seeks to drastically improve the AI model’s explain-ability.
Figure 1. LG AI Research’s Large Language Model, EXAONE
How LQAI works
The LG-Qraft AI-Powered Large Cap Core ETF (LQAI) aims to offer a carefully curated portfolio of 100 stocks selected through its proprietary deep learning AI models. Beginning with a universe of US large-cap equities, the engine assesses each individual stock for risk, selecting the top 100 with lowest risk exposure. Subsequently, the alpha[4] generation model scores each of these 100 stocks for their return potential and optimally weights them using the AI "agent." The resulting portfolio seeks to outperform the broader market, providing investors with a powerful tool to potentially enhance risk-adjusted returns within their portfolios.
Figure 2. Portfolio Derivation Process of the Artificial Intelligence ETF [LQAI] Pursuing Alpha through Advanced AI Conviction
Figure 3. Top 10 holdings of LQAI in February
(Qraft Technologies Inc. as of January 24, 2024)
*Holdings subject to change.
Figure 4. February LQAI Sector Exposures
(Source: Qraft Technologies Inc. as of January 24, 2024)
Conclusion
In conclusion, the LG-Qraft AI-Powered Large Cap Core ETF (LQAI) represents a paradigm shift in active investing, leveraging the synergy between LG AI Research's cutting-edge technologies and Qraft Technologies' market expertise. As investors navigate an evolving financial landscape, we believe this innovative ETF stands as a testament to the potential of AI-powered active management to unlock new dimensions of performance and resilience.
1. Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
2. https://www.fidelity.com/learning-center/trading-investing/etf-flows
3. Proprietary language model, also known as the Large Language Model (LLM), is a deep learning algorithm that’s equipped to summarize, translate, predict, and generate text to convey ideas and concepts.
4. Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.