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AI and The Hedge Fund Industry

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AI and The Hedge Fund Industry

There is a lot of talk these days about the ‘rise of the machines’, and where automation and robotics are being used to reduce costs, streamline performance, and open up a whole raft of new possibilities in different industries. For those with an interest in tech investment, perhaps because they are looking for good options for something like a SIPP or an ETF, AI and robotics have been a field that has garnered a lot of interest of late, too. While many focus on the innovations going on in things like supply chain management, and look at the way big retail brands use robotics and AI in their warehouses, what is actually even more interesting is the way analytical technology and AI is growing in the money management industry.

Paul Tudor Jones’ AI Investments

Paul Tudor Jones is one of the biggest names in the hedge fund world and is also notable for his apparent interest in gaining a competitive edge using AI. Last year he made significant investments in AI managed funds, including Cargometrics, which is backed by Eric Schmidt of Google fame, and Numerai, which is a fund that uses crowdsourcing technology. He cut 15% of his staff last year, introducing technology that has the objective of imitating the approaches of his most productive managers. He has, however, been quoted as saying that “No man is better than a machine, but no machine is better than a man with a machine.”. This suggests that his plan is to arm the best people with the best technology, rather than to ultimately entrust all trading activity to algorithms.

AI at Bridgewater

Another giant of the hedge fund sphere, Ray Dalio, is also very keen on AI and data science. As the founder of Bridgewater, the world’s biggest hedge fund, Dalio is keen that his business continues to be managed in his unique, very data driven way, even as he steps back from his role at the head of the company. Dalio isn’t just interested in what machines can do in terms of analytics and trading, but even in terms of running a business. Bridgewater uses systems in just about every area of its management, including systems where staff gives each other rankings throughout every day that are then aggregated to give a data-based view of each person’s weaknesses and strengths.

These kinds of systems belong to an overarching software product called PriOS, which Dalio believes will be capable of managing three-quarters of all decisions made at Bridgewater in the next five years. He has brought on board some of the best AI developers and data scientists, including David Ferrucci, who lead the IBM project to build the Watson supercomputer – famous for being able to beat humans on the Jeopardy quiz show in 2011.

BlackRock Replace Staff with Stock Trading Algorithms

Just a couple of months ago, BlackRock, the largest investment firm in the world, also announced that over 40 jobs would be passed on from humans to stock trading machines. Because stock pickers have been shown to regularly underperform markets, investors who keep an eye on these things are being increasingly persuaded to use cheaper alternatives, such as investing in exchange traded funds – many of which are managed entirely by computers. BlackRock had seen their assets under management rise over the psychological 45 trillion barrier for the first time as a result of this trend, and are now looking at other ways to improve their cost to profits ratio using technology. Consultancy Opimas recently analysed that they could expect to see a 28% improvement in this respect by replacing people with AI.

Industry-Wide Trends

The report from Opimas also reveals some other interesting forecasts for AI in the financial services sector. They predict that 10% of the human workforce industry-wide will have been replaced by IT by as early as 2025 – which amounts to 230,000 people. Of those jobs affected, 40% are predicted to be roles in money management, such as in hedge funds. Of course, this is not a trend that is limited to the financial services sector, given that PwC estimated recently that 38% of US jobs overall could be replaced by technology by 2030 – just twelve and a half years away. This does not, however, account for the increase in jobs in the tech sector to develop, manage and interact with these systems.

While the amount of development and investment going into innovation in market-predicting artificial intelligence may not be good news for the human stock pickers and hedge fund managers the technology seeks to replace, it does seem that we are a long way off of a scenario where computers make all of the decisions and even drive the stock markets and indices like the FTSE 100.

At present, humans are needed to set the objectives for the AI, and that is a strategic role that technology is a long way off being able to reliably fill. However, Bridgewater has shown that even the roles of executives and CEOs could eventually be automated, so it will be interesting to see how the role of humans in money management changes as innovation marches on.

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Vijay Prabhu

Live as if you were to die tomorrow. Learn as if you were to live forever. ― Mahatma Gandhi 

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