Do Mutual Funds Benefit from the Adoption of AI Technology?

Abstract

This paper examines the impact of AI technology adoption in the mutual fund industry by developing a new measure of AI adoption based on hiring practices. I find that this measure can predict fund performance. Funds with a high AI ratio outperform non-AI funds, after controlling for relevant variables. Further empirical evidence indicates that this outperformance is driven by improved stock picking skill rather than market timing skill. Mutual funds that adopt AI technology tend to tilt their portfolios toward stocks with voluminous information, and these stocks contribute to their superior performance. These findings suggest that AI is good at processing large amounts of data and providing a more comprehensive analysis of stocks.