Artificial Intelligence and Hedge Funds

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AI may be in charge of your next big financial move.

Artificial intelligence seems like an idea from the future, but many financial companies are proving that it is very much an idea of today. Should we trust these computers to handle important financial decisions? We’ll let you decide. For now, let’s uncover what any of this even means. How is AI used for your hedge fund?

Introduction to Hedging

Before leaping right into how artificial intelligence is being used to hedge your portfolio, let’s cover the basics.

Hedging is like insurance. It is done to make sure investors are still in good standing in the event of something bad happening with your investments. It can’t prevent anything from happening, but it can make sure the negative hit isn’t too bad. This is similar to when you buy car insurance. It won’t stop you from getting into an accident, but if you do, you aren’t left completely helpless.

Simply put, hedge funds protect you in the event that other investments do not perform well as you had hoped or lose you money.

The risk that investors are protecting themselves from is market volatility. Because of both systematic and unsystematic risks, markets are falling and rising constantly. With a diverse portfolio, an investor is protecting themselves from a market that may not be doing as well.

Remember, the goal of hedging is not to make more money. It’s to protect yourself from losses. The cost of a hedge is unavoidable. You could either be paying the cost of an option or lost profits from being on the losing end of a futures contract. Because of this, there are things that could go wrong, and it is important to be aware of the risks of hedging – just another reason an advisor is highly recommended for this financial planning step.

A hedge fund is responsible for a lot of things and are highly managed. With investments like futures and options, short and long investments, and more. It can be quite difficult to keep up with all of this, even for an expert. The advancement of artificial intelligence may have a solution to this problem.

AI and Hedging

 There has been a new hedge fund strategy that has emerged with recent technology. As computers become more necessary in quantitative hedge fund strategizing, some are relying solely on them. Artificial intelligence, or AI, is in the early stages of hedge fund managing.

Through machine learning, a diverse and growing field of artificial intelligence, algorithms have the capability to automatically learn from data and make predictions. This is an up-and-coming field and means a lot for not only the financial industry but everything else as well. Artificial intelligence and machine learning are used to create systems that parse images and video, understand and translate text, and help diagnose medical illnesses. How can this be used to help with your financial planning?

As the technology and studies increase, so do the advancements, applications, and opportunities for AI. One such application, the one that will be covered here, is the use of AI for hedge fund management.

What does that mean?

Quantitative hedge funds have been using computer algorithms for years to make trade decisions. The algorithms, however, were not able to keep up with the volatility of financial markets. They were based on static models managed by data scientists. The algorithms were inferior to the hedge funds created by humans, yielding bad returns.

Machine learning algorithms analyze huge amounts of data creating their own rules based on patterns and connections they find between different points of data. The software updates itself automatically as they take in new data.

Some hedge funds are even using technologies that scan keywords in news articles to help predict any rise and fall in financial markets. As you know, any amount of risk can cause fluctuation. Having a computer be able to use that information on trends and news to compute what kind of investments to make sounds like a radical idea, but it’s happening.

AI generated hedge funds are even outperforming those made by human workers. One of the most reliable AI hedge funds, Renaissance Technologies, has a Medallion Fund that gave positive returns of 20% to 98% from 2002 to 2016. Even during the financial crisis in 2007 to  2008, Medallion Fund gave returns of 85.8% and 98.2%.

It is predicted that hedge funds managed with AI is progressing so quickly that by 2025, artificial intelligence is set to replace 90,000 asset management jobs and 45,000 sales and trading jobs.

In addition, with the cryptocurrency rush of the past few years, it is almost inevitable that AI will soon turn to digital currencies as hedge funds.

What are the downfalls?

Many skeptics have their doubts about machine learning and using AI to hedge fund. They believe that AI doesn’t have the capability to avoid parameters that influence markets like political events and natural disasters. Though the technology is advanced and continues to develop, anything short of human intelligence is bound to fail.

There are typical technological challenges that AI will have to overcome as well if they want to perfect its use in hedging. Lack of transparency is one of them. As the machine learning is taking in more data, updating itself and its algorithms, the engineers behind the technology will find they are unable to explain why the system may have made an error. The built-in autonomy of the system will learn things the engineers are unaware of.

Alpen Partners and AI

Like stated earlier, it can be quite difficult to keep up with all of the work that goes into a hedge fund. Knowing that AI can be a significant help when it comes to your investments and financial goals, we couldn’t pass up the opportunity to get on board.

By partnering with a firm that uses artificial intelligence that has a built-in portfolio management system. With this system, we can stay up to date with the growing number investment opportunities for you and make sure you are getting the most out of your hedge fund.

Interested? Contact us now


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