How Artificial Intelligence Has Made Its Way From Wall Street's Top Hedge Fund
Source: Spencer Israel
The use of Artificial Intelligence as an investing tool was once reserved for the top of the Wall Street food chain. Only the largest commercial traders, financial institutions, hedge funds, and others with the necessary resources could implement an AI-based trading strategy into their portfolios.
But as Bob Dylan said, 'the times they are a-changin'. Today you'd be hard-pressed to find any financial institution, regardless of size or capital, that isn't utilizing AI in some way to inform how they trade. AI's influence over Wall Street has grown exponentially in the last decade, and as that's happened, the barrier to entry for individual traders to benefit from the power of AI has been lowered.
The Institutional Arms Race
Artificial intelligence first gained prominence among the Wall Street elite in the 1980's, when hedge funds like Renaissance Technologies began to incorporate it into their trading strategies. But as the application of this technology has improved through the use of more powerful servers and, more recently, the emergence of the cloud to train the AI on big global market data, so have the results and the amount of investment money flowing into quant funds that employ artificial intelligence.
In 2016, investments in quant funds-many of whom have made AI a core part of their trading strategies-grew by $13 billion according to Hedge Fund Research and Bloomberg. That same year, $83 billion flew out of fundamental hedge funds. In all, investment in quant funds has increased by 86 percent since 2010.
The reason for this most likely has something to do with outperformance. According to BarclayHedge, AI-based hedge funds have outperformed the overall hedge fund industry since 2010.
The reason for this most likely probably has something to do with outperformance. According to Eurekahedge, which tracks the performance of hedge funds, AI-based hedge funds have outperformed the overall hedge fund industry since 2010.
AI's Spread To Retail Investors
AI may be the strategy du jour among professional Wall Street traders, but gone are the days when only the institutions had access to its capabilities.
The introduction of robo-advisors has single-handedly made passive investing available to a new generation. Startups like Betterment, WealthFront and Stash quickly gained a foothold in this space, and were soon followed by traditional firms like Vanguard, TD Ameritrade, and Charles Schwab. BI Intelligence predicts that total assets under management in robo advisors will exceed $1 trillion by 2020.
AI is also available to active individual traders, who use their own computers and trading software to assist them in making their buy-sell trading decisions, thanks to the advent of powerful AI forecasting software like VantagePoint.
Much like the strategies employed by quant funds, VantagePoint uses neural networks - a form of AI machine learning - which model how the human brain processes information - to generate trend forecasts and create predictive, leading technical indicators on stocks, ETFs, futures, forex pairs, and cryptocurrencies.
Developed by trading software pioneer Louis Mendelsohn, VantagePoint broke new ground in 1991 as the first fully trained AI neural network trading software for individual traders. Its latest version forecasts the trend direction and changes in direction of hundreds of global financial markets based on its proprietary AI, for which Mendelsohn was awarded two U.S. patents in 2013.
All of this brings us to an industry on the cusp of a revolution in financial market analysis. The financial sector, arguably even more than the tech sector itself, has a strong financial incentive to embrace AI and benefit from its ability to drill down into the global markets, to find hidden patterns and relationships between global markets to make accurate forecasts and give traders the information that need to join the big institutions on the winning side of trades.
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