When Artificial Intelligence Is Revolutionizing the World of Investing
AI has been actively used in financial markets for a long time. But will it truly revolutionize the way we invest? A look at the current state of affairs
Algorithmic trading was pioneered by investor Jim Simons, who decided to use mathematical models to analyze market data and predict stock prices. In 1982, he founded Renaissance Technologies (RenTech), which operates the algorithm-driven Medallion Fund. Although its performance initially lagged behind the market, the firm subsequently managed to increase its profits and achieve an average annual return of 35%, after fees. As of the end of March 2023, RenTech manages a portfolio of $121.85 billion. The industry’s largest hedge fund, Bridgewater Associates, manages $169 billion in assets, also using quantitative methods. In 2022, the Pure Alpha flagship fund rose 32% in the first six months but ended the year with a gain of only 9.5%.
AI for the Benefit of as Many Portfolios as Possible
The AI Powered Equity ETF (AIEQ) is the first fund to fully utilize AI in its portfolio construction. Its assets under management currently total $117 million. The algorithm analyzes all available information on 6,000 securities, including financial statements, company updates, macroeconomic statistics, price level analysis, and technical signals. The fund’s largest holdings are in the financial, healthcare, and information technology sectors. However, since its launch, the AI fund’s returns have been significantly lower than those of the S&P 500 index.
The South Korean company Qraft Technologies offers four AI-managed funds. Among them are the Qraft AI-Enhanced U.S. Large Cap Momentum ETF (AMOM) and the Qraft AI-Enhanced U.S. Next Value ETF (NVQ). AMOM focuses on the momentum factor, selecting stocks with the best returns over a 3- to 36-month period. The NVQ employs a value-oriented investment strategy. The algorithm takes into account not only underlying value metrics (P/B, P/E, and EV/EBITDA multiples) but also the valuation of intangible assets. Both ETFs invest in the technology, industrial, and consumer goods sectors.
The WisdomTree International AI Enhanced Value Fund (AIVI) began developing a quantitative AI model in early 2022. AIVI invests in large- and mid-cap stocks in developed markets, excluding the United States and Canada. Since the beginning of the year, the fund has gained 10.45%, while its benchmark, the MSCI EAFE Value Index, has risen 7.49%.
Also worth noting is the BTD Capital Fund (DIP), which is based on the classic “buy the dip” strategy. This fund was the first to use AI for asset selection and trade management. The DIP was launched a little over a year ago and still trails the S&P 500.
Most AI ETFs underperform the market as a whole, partly because they are still relatively new. At the same time, they charge significantly higher fees than the industry average—often exceeding 1%. Furthermore, the algorithmic ETF segment is still in its early stages, and so far, the assets under management in these funds are negligible compared to the entire U.S. exchange-traded fund market, which is estimated at $6.98 trillion. Nevertheless, they have every chance of growing, both in terms of overall performance and profitability.
(Source: Freedom Broker)
