While artificial intelligence has long since proved its worth in a number of sectors hedge funds are only recently starting to latch on to the technology as a means of improving their business. While quantitative hedge funds have long used computer algorithms to make trade decisions these were often limited. This is because they were driven by static models and were developed and managed by data scientists. This form of artificial intelligence wasn’t adept at dealing with the volatile financial markets. As a result it often yielded results that were inferior to decisions made by humans.
The recent developments in the fields of machine learning and deep learning as well as the creation of software has driven a raft of innovations. This has allowed for the creation of algorithms that can analyse huge amounts of data. These algorithms can also define their own rules based on the patterns and connections they find between different data points. Modern artificial intelligence means that machine learning software autonomously updates itself as it analyses new data.
This has led to the creation of systems that are efficient at analysing the content of images and videos as well as understanding and translating the context of spoken and written language. It is this advanced form of artificial intelligence that has got the attention of several Wall Street hedge funds.
One such hedge fund is Man Group; they have been using artificial intelligence to make trade decisions in its AHL Dimension fund since 2014. The process is relatively simple; Man Group’s engineers set the boundary parameters for the algorithms before feeding in the data. The technology is then able to discover patterns and correlations that would go unnoticed by human analysts.
These algorithms can also compare new data with historical patterns and predict how things will unfold. This allows Man Group to apply the model to fast trade decisions and also make educated predictions for several weeks into the future.
The explosion in the generation of data and online services that has happened in recent years has added to the appeal of artificial intelligence. This sea of publicly available information, sometimes called alternative data, can be used to complement financial data, helping help traders to make more informed decisions. This alternative data can include everything from social media discussions to satellite imagery. When analysed correctly, with the aid of artificial intelligence, this information enables analysts to better predict how stocks will perform.
Despite the advantages artificial intelligence still has to overcome several obstacles in the coming years. Some doubt that anything short of human level artificial intelligence will struggle to sufficiently interpret the effect that a range of seemingly inconsequential things can have on the financial markets. These things can include politics, economics and even natural disasters. At Man Group, since engaging in artificial intelligence the AHL fund has gained 15 percent in three years. While this is nearly double the industry average it is still lagging behind the S&P 500.
Hedge funds that use artificial intelligence must also overcome the challenges that will come with the benefits. For example as artificial intelligence algorithms become more sophisticated, those that build them find it harder to explain how they work. This in turn can make it difficult to explain to customers why they have made a wrong decision. To counteract this Man Group makes sure that human analysts examine unusual trades before they’re executed.
Those who decide to use artificial intelligence will also have to be wary of the data they acquire, especially if it has been obtained from consumers. While using publicly available data is not technically insider trading, the definition of what data is public and therefore able to be used is yet to be clearly defined.
Nonetheless, proponents of machine learning and artificial intelligence are certain that algorithms are the future of trade.