Failed AI Hedge Fund? Don’t Blame Artificial Intelligence, Blame the Program

Artificial Intelligence

I read the following piece from Bloomberg and all I could think was “DON’T BLAME THE AI”.  Artificial intelligence is an incredible tool, and has myriads of applications both within and outside the trading realm.  But it also has its limitations, inasmuch as it’s only as good as its’ programming.  So it was with much fanfare that it was recently announced that an AI-based hedge fund, Sentient Investment Management, closed after less than 2 years, and after only earning 4% its first year.

It used algorithms to create the equivalent of trillions of “virtual” traders, and was said to be able to squeeze 1800 trading days into a few minutes, while scouring its multiple computers for the best trading strategies.  NOW MAYBE (or obviously), that wasn’t such a great strategy to try to create.  It managed to demonstrate how many terrible trading strategies might be possible, so much so that they overwhelmed the returns.  

Long story long?  Let trading professionals design the strategies – then create the AI around their input.  But whatever you do, don’t blame the AI for the tactical strategy error in this now extinct hedge fund.  As they say, “garbage in, garbage out”.  
(Cindy Taylor/Publisher)

The fledgling world of AI hedge funds is claiming one of its first casualties.

Sentient Investment Management is notifying investors of plans to liquidate the hedge fund it started in late 2016, according to people with knowledge of the situation. The fund managed less than $100 million and hasn’t made money this year after gaining 4 percent in 2017, one of the people said.

Sentient, based in San Francisco, used artificial intelligence techniques, including machine learning and so-called evolutionary algorithms, to trade stocks globally. It followed a market-neutral strategy in which bets on rising prices were matched by wagers on falling ones.

Jeff Holman, Sentient’s chief investment officer, declined to comment.

Hedge funds have been exploring AI, upgrading trading technologies and employing data scientists as the industry confronts years of mediocre returns. The investments appeared to be paying off — until now. Before this year, the Eurekahedge AI Hedge Fund Index gained an average of 10.5 percent annually since its 2011 inception. This year, the measure of 15 funds is little changed….

The full article was provided by Bloomberg News, and appears on Financial Advisor