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How is AI Shaking Up Hedge Funds?

Capital Markets CIO Outlook | Thursday, June 25, 2020

The accelerating use of AI in hedge funds and its expanding use cases are helping companies kick-start a new era of investment business.

FREMONT, CA: Artificial Intelligence (AI) has featured heavily in business innovation headlines for quite some time. Yet, for all the excitements AI holds, the uptake in the hedge fund industry has been limited until recently. But today, hedge funds' use of AI is accelerating and, especially in investing, cost models, and recruitment, and it is reshaping the industry.

Several hedge funds are using AI to analyze masses of data, predict correlations in supply and demand imbalances, and forecast market movements for skillful asset location. This can assist a team in combining different strategies and tailor allocations. The use of AI is playing out across a wide spectrum of investment managers from pure AI-driven specialists to traditional fundamental investors looking for an edge. A growing number of firms across the spectrum are also turning to AI to improve efficiency in their operations, accounting, and investor relations functions.

A class of AI pure-play hedge funds has emerged recently that are based entirely on machine learning and AI algorithms. This is pushing the boundaries of the hedge fund business model. Hedge fund managers and service providers are also using AI to optimize middle and back-office tasks. As hedge fund business move away from managing work through spreadsheets to digital and cloud enterprise resource planning solutions, AI can provide an edge. Even though not all hedge fund process can be completely automated, AI can speed up reconciliation, mitigate errors, and ultimately reduce costs.

Software and service providers to hedge fund spaces are also using AI to help their clients operate more efficiently and accurately. Using AI and machine learning to analyze historical trade break data can predict the root causes of current trade breaks with high probability. In an industry that still suffers from manual, intensive reconciliation challenges, the use of AI has the potential to reduce costs and accelerate production processes significantly.