AI-Dependent Hedge Funds Underperform the Industry

September 2, 2019 | Artificial Intelligence, News

Reasons why AI funds are trailing this year.

AI hedge funds have underperformed against human managers in 2019. However, over the last five years, they still lead by a wide margin.

Hedge funds that are dependent on AI technology have returned a mere 2.77% this year up to July versus a return of 6.36% achieved by the industry.

That’s despite the hype surrounding artificial intelligence as a pathbreaking technology that would dominate investment management.

What’s not working

One reason for the underperformance could be that the AI models are not getting enough data to crunch. For example, limited availability of historical data such as social media or satellite imagery may exist. Back data is crucial to “train” AI models so that they can pick up trends in live mode.

In addition, fund managers may face the switchover from traditional investment strategies to AI-dependent models. This switch could have a longer-than-expected learning curve.

A third factor could be the current, highly volatile, “tweet-sensitive” nature of financial markets, a transformation from a few years ago. AI-led models could be on the learning curve here.

Why these funds matter

The asset management industry is hoping that AI will help improve fund returns. The industry also hopes it can cut back-office overhead costs and generate investment insights for clients.

In a somewhat extreme view, the Japanese Government Pension Investment Fund said AI might even replace human fund managers entirely.

JPMorgan was reported to be planning a strategy to invest in emerging and established AI lead hedge funds through its Machine Learning Fund Ltd vehicle.

Blackrock, the world’s largest investment group with $ 6.3 trillion in management, is setting up a “Blackrock Lab for Artificial Intelligence” in Palo Alto, California.

For more stories on artificial intelligence, try this one.

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