At the most fundamental level it is a relatively simple machine. But many people don’t understand it – or they don’t agree on how it works – and this has led to a lot of needless economic suffering.
One of the highest-earning asset managers in the world, the Bridgewater Associates founder is now taking the theory literally by starting a new unit at his hedge fund that will be responsible for developing a system which combines artificial intelligence and trading. The team will begin working on the project in the near future and is currently comprised of six people, including David Ferucci, who created IBM’s first cognitive system called Watson. Watson, which debuted on Jeopardy! in 2011, was able to beat two contestants and answer trivia questions using natural language, jargon and slang.
Although the use of electronic trading platforms to beat the market is not a novel idea, hedge funds that have employed algorithmic practices performed better than those that didn’t by profiting from arbitrage pricing, purchasing government bonds, and betting on declining oil prices. Similar to IBM’s Watson, Bridgewater’s new AI system will have these features as well as be able to adjust investing strategies based on new information that was not previously determined in its initial programming.
In an interview with Bloomberg, Gustavo Dolfino, CEO of recruitment firm WhiteRock Group noted that electronic platforms allow hedge funds to obtain a competitive advantage in markets where trading has been handicapped by rich asset prices.
“Machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it,” Dolfino said.
Other notable business leaders who have prompted a resurgence of investment in artificial intelligence include Alibaba (NYSE:BABA) Chairman Jack Ma and Microsoft (NASDAQ:MSFT) CEO Bill Gates. Last month, Ma stated that Alibaba will significantly expand its research in this subject to improve sales. Bill Gates is also a proponent of additional research, but he is more concerned with how AI can be used to replace human jobs. He is wary of AI becoming too advanced and believes that it requires heightened surveillance and regulation.
In a Reddit “Ask me Anything” session, the Microsoft co-founder discussed the negative implications from AI. He stated:
I am in the camp that is concerned about super intelligence. First the machines will do a lot of jobs for us and not be super intelligent. That should be positive if we manage it well. A few decades after that though the intelligence is strong enough to be a concern. I agree with Elon Musk and some others on this and don’t understand why some people are not concerned.
The artificial intelligence that Bridgewater will use may not be the kind Gates was referencing, even though it could conceivably remove humans from the investment process. However, the firm is more focused on partnering with data scientists to capture investment opportunities that human traders may miss rather than replacing jobs with a purely electronic process.
And without the use of artificial intelligence, the firm is still making smart investment decisions.
In the $2.8 trillion hedge fund industry, Bridgewater’s performance has been significantly better than its peers and has produced high returns. The firm’s pure Alpha II fund returned 8.3% in January versus the 1.1% average of comparable macro funds. Currently, Bridgewater Associates has a market value of approximately $12.5 in assets and its portfolio is comprised of more than 80% of investments in the financial sector.