The Future of Investing: How Artificial Intelligence Could Revolutionise the Market
4th August, 2023In this episode of Galaxy Brain Investor, Theo explores how AI is poised to transform the investing landscape as we know it.
The potential of AI in investing has grown in recent years and hedge funds have increasingly adopted AI to help inform their investment decisions. Many hedge funds are using AI to analyse vast amounts of unstructured data, also known as big data, using these tools to find relationships within this data and to make forecasts about the economy and markets.
Prominent hedge funds, such as Man AHL, Citadel, Bridgewater, and D. E. Shaw, have integrated AI-powered models into their trading strategies. These AI models have the advantage of adaptability, and they can respond to changing market conditions without significant manual adjustments.
While it's challenging to gauge the overall impact of AI on hedge funds due to their secrecy, it's clear that AI is a significant player in their decision-making processes.
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There is an AI hedge fund index, produced by EurekaHedge, which has outperformed the broader hedge fund index since 2010. However, this AI hedge fund index is relatively small, comprising only about 12 funds, while the broader index includes a vast number of funds following different strategies. So, direct comparisons may not be entirely accurate.
Despite some early successes, investing solely in AI-powered funds might not be the best strategy at this stage. The Artificial Intelligence Powered ETF, for instance, has yielded around 3% returns annually over the past five years, considerably lower than the S&P 500's 11%.
AI's influence extends beyond the world of investing and its potential for transforming industries is vast. Companies that leverage this technology stand to gain a competitive advantage if they employ the technology correctly. But while AI holds enormous promise, investors should also approach the AI hype with caution.
Historically, hype often leads to speculative investments and subsequent market crashes. It's essential to carefully assess AI companies and funds before investing, considering their true potential and financial stability. It could be in this space that AI-powered tools, like ChatGPT, may offer some advantages in trading. Their lack of emotion and biases might help traders improve their performance by identifying behavioural patterns that hinder decision-making.
While AI continues to evolve rapidly, we cannot overlook the human element in investing. Combining human expertise with AI's analytical power might prove to be the winning formula for successful investors in the future.
