According to JP Morgan’s report Big Data and AI Strategies Machine Learning and Alternative Data Approach to Investing, artificial intelligence (AI) is having a notable impact on the investment landscape.
Advances in AI and machine learning are presenting a sea of change in new data sets and methods to conduct investment analysis.
The emergence of new alternative data sets includes the potential of aggregate price data to analyze inflation, satellite imaging to determine oil production and anticipation of sales estimates through the acquiring of data on customer transactions, the report stated.
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Give me my free report!According to PwC, AI has been involved in trade execution and high-frequency trading (HFT) algorithms. Firms have leveraged the ability to seize any advantages from very small price discrepancies in a matter of a split second through these algorithms.
AI has extended across new applications; firms are now applying new data sets and indicators for risk modeling, scalability in data processing and data analyses. The report further notes that leading purveyors of AI applications in investing have typically been quantitative hedge funds.
In that regard, the Investing News Network (INN) spoke with Rick Roche, managing director of Little Harbour Advisors, a company that uses a tactical investment approach through applying an algorithm to its investment strategy. Roche, a chartered alternative investment analyst, discussed how AI and machine learning can be applied to gain a competitive advantage in the investing space.
In particular, Roche — who has consulted for over 85 companies — spoke about four hedge funds among the 15 largest hedge funds in the world that are pioneers in applying AI and machine learning methods and alternative data sets to their investment approach: Renaissance Technologies, DE Shaw Group, Bridgewater Associates and Two Sigma.
Here’s a closer look at those hedge funds.
1. Renaissance Technologies
As the fourth largest hedge fund by assets under management (AUM) in the US, Renaissance Technologies provides quantitative investing methods based on mathematical and statistical strategies. The fund’s strategies are not disclosed to the public.
The fund managed US$57 billion in AUM in 2018 according to Pensions & Investments. As a pioneer in applying AI to its investment strategies, Renaissance is known for hiring people with doctorates in mathematics and statistics.
Co-founder Howard Morgan has a doctorate in operations research from Cornell. James Simons, who is also a co-founder, has a doctorate in mathematics from the University of California, Berkeley, and previously worked at the National Security Association in the mid-60s.
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Give me my free report!Renaissance Technologies averaged 35 percent annualized returns between 1990 and 1998.
According to its first quarter of 2019 Security and Exchange Commission (SEC) 13-F filings, Renaissance’s biggest stakes are in VeriSign (NASDAQ:VRSN) and Align Technology (NASDAQ:ALGN).
2. DE Shaw Group
DE Shaw Group was founded by David E. Shaw, professor of computer science at Columbia. DE Shaw’s investment method integrates computational techniques based on 30 years of research. The company applies both qualitative and systematic strategies to its approach. Similar to Renaissance, DE Shaw’s strategies are veiled in secrecy.
“There are some good ideas at the intersection of systematic and discretionary investing,” DE Shaw managing director Max Stone told the Financial Times. At the core of DE Shaw’s approach is a grounding in scientific perspectives.
Last year, DE Shaw’s Composite Fund witnessed 11.2 percent in returns, according to Reuters. The hedge fund, with US$50 billion in AUM, formerly employed Jeff Bezos, who is now the CEO of Amazon (NASDAQ:AMZN).
Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Qualcomm (NASDAQ:QCOM) are among the fund’s holdings, as of the first quarter of 2019.
3. Bridgewater Associates
Ray Dalio, founder of Bridgewater Associates, began developing algorithms designed for investing in the 1980s. Dalio created algorithms based on rules that he developed and then cross-examined them against historical market trends. In addition, when a flaw was detected, the algorithm was adjusted accordingly.
According to Forbes, Paul Volker has described Bridgewater as developing “more relevant statistics and analyses than the Federal Reserve.” Bridgewater is known to keep its investment process undisclosed. Less than 15 people have the entire knowledge of the company’s investment approach.
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Give me my free report!In an interview with Forbed, Bridgewater’s head of investment research Karen Karniol-Tambour said that the company is focused on international markets and China.
Karniol-Tambour discussed how smaller bond markets, such as Brazil, are more liquid than they were in 2013, which provides a potential investment opportunity.
Bridgewater’s most recent 13-F filing provides insight into a number of significant holdings in international index funds. These include the iShares Core MSCI Emerging Markets ETF (NYSE:IEMG), which holds a number of emerging market companies. Among the iShare’s ETF’s top holdings as of June 11 are Tencent Holdings (HKG:0700), Alibaba (NYSE:BABA) and Taiwan Semiconductor Manufacturing (TPE:2330).
Bridgewater also has stake in iShares MSCI Emerging Markets ETF (NYSE Arca:EEM), which is focused on large- and medium-sized emerging market companies; SPDR S&P 500 ETF TR (NYSE Arca:SPY), which follows the S&P 500 index; and Vanguard’s FTSE Emerging Markets ETF (NYSE Arca:VWO), which tracks the FTSE Emerging Markets All Cap China A Inclusion Index, with 35.8 percent market allocation of its holdings being based in China.
4. Two Sigma
With its headquarters in New York, Two Sigma was founded in 2001 with US$51 billion AUM. Two Sigma is the fifth largest hedge fund in the world. It has applied AI-driven natural language processing algorithms to analyze meeting minutes from the Federal Reserve. It has used this analysis to gain a greater understanding of interest rates, monetary policy and broader economic implications from the meeting minutes.
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Founder David Siegel spoke at a World Economic Forum roundtable, where he discussed the benefits and shortfalls of AI technology, citing the challenges behind algorithms explaining their outputs and the impact of AI promoting and having an impact on greater monopolies.
According to its SEC 13-F filings from March 31, 2019, Two Sigma’s holdings include Amazon, the Invesco QQQ fund (NASDAQ:QQQ) and the iShares Russell 2000 ETF (NYSE Arca:RCM).
Canadian funds applying AI
Roche further discussed two Canadian portfolio managers that are applying AI techniques. These include Investifai, which is based in Ottawa, and Castle Ridge Asset Management, which is based in Toronto.
Applying deep learning and AI to its portfolio management strategy, Investifai provides core satellite solutions, quantitative strategies, and machine learning models to its client base.
Castle Ridge has developed W.A.L.L.A.C.E., its proprietary AI technology, which the company has stated has predicted 40 company acquisitions in a 2 year period in addition to major market downturns.
“Right now, I believe that, although today there are dozens to maybe a couple hundred investment managers that are using machine learning and alternative investment data,” Roche told INN, “I believe that we’re literally at the cusp of that, and that most advisers and most asset managers are far, far too complacent.”
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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.