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Analysis Why Machine Learning Hasn't Made Investors Smarter

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Hedge funds have been in the doldrums and face mounting pressure to justify their fees. Will artificial intelligence come to the rescue? A growing number of hedge funds are putting money behind the idea that a branch of AI called machine learning could provide a way to get back on top. A software program that searches for regularly occurring patterns in more data than even the most sleep-deprived junior analyst could examine, and then tests its hypotheses against even more data. What can satellite shots of mall parking lots tell you when combined with in-store sales data?


two-sigma-s-siegel-says-artificial-intelligence-lacks-smarts

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David Siegel, a quantitative hedge fund pioneer, issued a warning to investors: Artificial intelligence lacks common sense. Siegel, who has used AI to build his Two Sigma Investments into a 37 billion hedge fund firm, said algorithms are limited by the scant amount of training data available to instruct them on how to identify everything from objects in images to trading opportunities. Hedge funds are embracing a form of AI called machine learning years after Two Sigma deployed the technology and as stock and bond pickers struggle to outperform markets. A unit of the firm, called Two Sigma Ventures, seeks to invest in companies focused on data science, machine learning, artificial intelligence and advanced hardware.


The stockmarket is now run by computers, algorithms and passive managers

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FIFTY YEARS ago investing was a distinctly human affair. "People would have to take each other out, and dealers would entertain fund managers, and no one would know what the prices were," says Ray Dalio, who worked on the trading floor of the New York Stock Exchange (NYSE) in the early 1970s before founding Bridgewater Associates, now the world's largest hedge fund. Kenneth Jacobs, the boss of Lazard, an investment bank, remembers using a pocket calculator to analyse figures gleaned from company reports. His older colleagues used slide rules. Even by the 1980s "reading the Wall Street Journal on your way into work, a television on the trading floor and a ticker tape" offered a significant information advantage, recalls one investor. Since then the role humans play in trading has diminished rapidly. In their place have come computers, algorithms and passive managers--institutions which offer an index fund that holds a basket of shares to match the return of the stockmarket, or sectors of it, rather than trying to beat it (see chart 1).


Two Sigma Says Artificial Intelligence Lacks Smarts

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David Siegel, a quantitative hedge fund pioneer, issued a warning to investors: Artificial intelligence lacks common sense. Siegel, who has used AI to build his Two Sigma Investments into a 37 billion hedge fund firm, said algorithms are limited by the scant amount of training data available to instruct them on how to differentiate objects in images. "Artificial intelligence today doesn't have anything that resembles common sense, and common sense is a key feature of intelligence," Siegel, 55, said at the Bloomberg Markets Most Influential Summit on Wednesday. Hedge funds are embracing a form of AI called machine learning years after Two Sigma deployed the technology and as stock and bond pickers struggle to outperform markets. Highbridge Capital Management, Bridgewater Associates and Point72 Asset Management are among firms trying to profit from machine-learning algorithms, which automatically find patterns in large batches of financial data to inform investment calls.