Hedge Funds Cautiously Embrace AI More Widely, But Still Wary of Technology

traders

OH Artificial Intelligence, I love you. Machine Learning, you’re the one for me. BUT, I just don’t know if I’m ready to commit yet. Yes, AI and machine learning are taking over more and more functions in all kinds of businesses but not fully yet in the asset management (hedge fund) sector. Seems that a lot of work in the “automatic brain” area is still being tested and some results have not been that stellar. One other reason? EGO. What happens if you are a brilliant (?) fund manager who is bullish and your ‘machine’ gets bearish? Does the ‘machine’ get fired? Who wins?
(Bill Taylor/CEO)


“ARTIFICIAL intelligence (AI) has already changed some activities, including parts of finance like fraud prevention, but not yet fund management and stock-picking. That seems odd: machine learning, a subset of AI that excels at finding patterns and making predictions using reams of data, looks like an ideal tool for the business. Yet well-established “quant” hedge funds in London or New York are often sniffy about its potential. In San Francisco, however, where machine learning is so much part of the furniture the term features unexplained on roadside billboards, a cluster of upstart hedge funds has sprung up in order to exploit these techniques.

These new hedgies are modest enough to concede some of their competitors’ points. Babak Hodjat, co-founder of Sentient Technologies, an AI startup with a hedge-fund arm, says that, left to their own devices, machine-learning techniques are prone to “overfit”, ie, to finding peculiar patterns in the specific data they are trained on that do not hold up in the wider world. This is especially true of financial data, he says, because of their comparative paucity. Share-price time series going back decades still contain far less information than, say, the image data used to train Facebook’s facial-recognition algorithms…”


Full Story at Economist.com