Despite widespread AI-usage, human decisions are still more critical

Bild: Pixabay
Bild: Pixabay

The latest BarclayHedge Survey reveals that a majority of Hedge Fund Pros use artificial intelligence and machine learning in investment strategies. Two-thirds of the respondents use AI/ML to generate trading ideas and optimize portfolios.

20.08.2018, 11:50 Uhr

Redaktion: ans

Artificial intelligence (AI) and machine learning (ML) are here to stay in the hedge fund industry, but the humans are still making the most critical decisions. That’s the key takeaway from the latest Barclay Hedge Fund Manager/Investor Survey, a quarterly report on the sentiments of professionals in the alternative investments sector.

AI/Machine Learning is used to inform investment decisions
Concerns about machines taking over the alternative investments landscape may be premature. Amid the breathless hype about automation, fin-tech, and big data, more than four out of ten of the survey’s respondents still rely on conventional human thinking to guide their investment processes.

Nevertheless, the 56.4% of respondents using AI/ML suggest we’ve passed the half-way point in the race to digitize alternative investment processes.

A breakdown of the respondents’ employers shows that just over half work for CTAs, and six out of ten of them use AI/ML. That’s hardly a surprise, given that automated CTAs are the predominant managed-futures model (the Barclay Fund Flow Indicator, for instance, estimates that systematic CTAs hold eight times more assets than their discretionary counterparts).

AI/ML as trading ideas generator and portfolio optimization
AI and machine learning let traders and portfolio managers scan immense data sets and act on data that informs a desired outcome. The algorithms optimize positive outcomes and downgrade adverse results automatically, essentially teaching themselves what works and what doesn’t.

The hedge fund pros which were surveyed are not turning everything over to the algorithms. Instead, they’re using them to formulate investment ideas and build portfolios informed by data analysis that the human brain could never hope to accomplish. Just over a quarter use AI/ML to execute trades, suggesting a general reluctance to let the machines pull the trigger.

The survey respondents are giving the machines their due. More than one-half say AI/ML guides 20-60% of their decision-making, and just under one-fifth say it accounts for 80-100%. The 43% average reinforces the proposition that the people are still running things, but they rely deeply on advanced automation and data-analysis tools.

Smaller funds enjoy more AI/ML applications
Hedge fund pros have always enjoyed access to the most advanced analytical tools. Indeed, more than half of our respondents have been using AI three years or more, and a plurality have used them for more than five years.

These results pose an intriguing question: Have the hedge fund quants who have used AI/ML for years become set in their ways—and thus vulnerable to disruptive fin-tech newcomers?

More than two-thirds of our survey respondents use AI/ML on assets of less than $50 million, suggesting a disinclination to make big bets on the bots. Another possibility is that smaller funds are better able to execute their trades without giving away their techniques and strategies to competing funds.

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