How hedge funds are using AI and machine learning

Hedge funds are increasingly turning their attention towards artificial intelligence technology to get an edge on the competition when it comes to trading strategies.

Quantitative trading - a subset of what hedge funds do which focuses on algorithms and computers to trade clients' assets - is a natural testbed for machine learning technology, which is good at spotting trends in big data sets and executing at high speed.

For example, at Man Group - a London-based hedge fund - "by 2015 artificial intelligence was contributing roughly half the profits in one of Man's biggest funds, the AHL Dimension Programme that now manages $5.1 billion, even though AI had control over only a small proportion of overall assets," as reported by Bloomberg.

For what it's worth, European Union lawmakers have attempted to legislate against algorithm-centric funds disrupting the market with the Markets in Financial Instruments Directive (MiFID II) regulation. Britain's Financial Conduct Authority (FCA) meanwhile is charged with maintaining order in UK markets, but these efforts can be difficult when the algorithms are by their nature difficult to investigate - also known as black box algorithms.

Read next: How do we legislate for AI in algorithmic trading?

That being said, any quant fund worth its salt should be investigating the technology at this point, and here are a handful that are on the record as doing so.

Man Group
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Man Group

The high-flying hedge fund, which recently recorded $100 billion under management, invests heavily in AI technology through its Man AHL department, which was founded in 1987 and focuses on quantitative investment management.

Now, with machine learning algorithms - or more specifically, deep learning - researchers can program computers to look for trends and execute on them without being given specific guidance.

Renaissance Capital
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Renaissance Capital

Notoriously secretive quantitative trading hedge fund Renaissance Capital has an employee-only quant fund called Medallion which leans heavily on AI techniques, according to Bloomberg.

The fund reportedly makes 40% annualised returns after fees.

Two Sigma
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Two Sigma

New York-based hedge fund Two Sigma is another quant fund like Renaissance which focuses on algorithmic trading and manages more than $50 billion.

The hedge fund is hiring machine learning specialists at a clip and has run competitions for data scientists.

Bridgewater Associates
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Bridgewater Associates

One of the biggest hedge funds in the world, Bridgewater Associates, is investing in automation software for the day-to-day management of the firm, "including hiring, firing and other strategic decision-making", according to The Guardian.

The firm launched a specialised unit called Systematized Intelligence Lab in early 2015, headed up by former IBM Watson employee David Ferrucci.

Point72
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Point72

Point72 founder Steve Cohen opened a Palo Alto office of Point72 Ventures to invest in early-stage companies focused on big data and machine learning last year.

The firm is also experimenting with using advanced analytics to automate the sort of decisions normally reserved for money managers, according to Bloomberg.

Citadel
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Citadel

Chicago-based Citadel hired a chief AI officer in May 2017 when it attracted Li Deng away from Microsoft.

Sentient
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Sentient

San Francisco-based upstart Sentient Investment Management is "developing and applying quantitative trading and investment strategies built using Sentient Technologies’ proprietary artificial intelligence platform," according to its website. The company is actively recruiting machine learning specialists.

UBS
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UBS

Not a hedge fund, admittedly, but the world's biggest wealth manager UBS is building "virtual agents" that can perform investment research to near-human levels.

Speaking at the TechXLR8 event in London last year, Annika Schroeder, AI lead at UBS Group Innovation said that the bank is "trying to build virtual agents that can imitate the quality of an investment analyst".

Read next: UBS developing AI tool for investment research

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