AI going to head of the class
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • John Haggerty
      Sector’s risks need to be weighed, consultant says
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      Private equity’s health-care role draws spotlight
      Some alternative strategies struggle in first quarter following tough 2020
      Close up of Business people shaking hands, finishing up meeting, business etiquette, congratulation, merger and acquisition concept
      Cathay Innovation Partners takes minority stake in Seaya Ventures
    • Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
    • American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off'
      Michelle Dunstan
      Move to link exec pay to ESG integration growing
      The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
    • Pentegra joins with EPIC to offer 3(16) fiduciary services
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
      Interest rises in keeping retiree assets in-plan
      Pentegra launches pooled employer plan
    • Focus on human rights a challenge in China
      Michelle Dunstan
      Move to link exec pay to ESG integration growing
      WTW to cut carbon footprint of OCIO portfolios by half by 2030
      SEC Commissioners Testify Before The House Financial Services Committee
      SEC shouldn’t require ESG metrics – commissioner
    • Joel Holsinger
      Ares wants to do good – and profit – with fund
      Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
      Riscura stories
      Dystopian tales explore altered retirement reality
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • Sterling Bancorp to pay $12.5 million to settle Oklahoma Police suit
      American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off'
      Morgan Stanley logo on buidling corner with stock ticker showing stock prices and movements
      Morgan Stanley joins bank bond bonanza with 3-part sale
      BentallGreenOak closes latest European fund at $2.3 billion
    • Carrie Peluso
      SSGA promotes executive to head of global manager research
      Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      Ameriprise, Amundi add to their European rosters
      Larry Fink
      BlackRock tops $9 trillion on record inflows
    • PennPSERS boosts employee contribution rates after reporting error
      Melrose Industries to plug U.K. pension deficit by selling assets
      Public plan funding inches up in first quarter
      Louisiana Firefighters puts Boston Partners on watch
    • Carrie Peluso
      SSGA promotes executive to head of global manager research
      Cohen & Steers adds team for new private real estate business
      Sacha Sadan
      FCA taps LGIM executive for first director of ESG
      Tufts taps interim co-CIO as new investment chief
    • European private equity deal value, volume hit records for first quarter
      Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
    • BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
      Australia’s Centuria makes takeover bid for Primewest
      CalSTRS indutrial property
      Investors hungry for industrial properties
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • GPIF prepares to make first direct alternatives allocations
      Ohio State Teachers calls on Hellman & Friedman buyout fund
      South Carolina discloses up to $495 million in commitments
      Fonds de Reserve looking for dollar-denominated corporate debt managers
    • GPIF prepares to make first direct alternatives allocations
      Ohio State Teachers calls on Hellman & Friedman buyout fund
      South Carolina discloses up to $495 million in commitments
      Fonds de Reserve looking for dollar-denominated corporate debt managers
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for April 2021
      Graphic: The state of DC plans
      Graphic: Invesco’s bid for performance gains
      Private real estate funds continue rebound
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. ALTERNATIVES
March 06, 2017 12:00 AM

AI going to head of the class

Managers realizing artificial intelligence a required course

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Thomas Broening
    Jeffrey Shen said recent advances in computing power are allowing more comprehensive data analysis than ever before.

    Enticed by the prospect of better outcomes from deeper analysis of vast amounts of newly available data, hedge fund managers are turning en masse to artificial intelligence and its subset, machine learning, to fine-tune their investment processes.

    Long the tools of the largest, most sophisticated and well-heeled systematic quantitative hedge fund managers, AI/ML processes are making their way down to smaller quantitative and fundamental firms at a rapid rate, sources said.

    Data-driven approaches “are still are in their infancy in many industries, not just investment management,” said Daniel Connell, managing director and head of market structure and technology at manager consultant Greenwich Associates, Stamford, Conn.

    But based on recent advances in the investment arena, such as robo-advisers that provide asset allocation advice to individual investors based on machine-learning processes, Mr. Connell predicted “the growth in the adoption of AI and machine learning by money managers will be faster than we've ever seen before.”

    A very small cadre of well-established managers dominate the ranks of quantitative hedge funds because of their strong record of harnessing big data with the use of machine learning. Observers said even quick implementation now of AI/ML will not help later-adopting hedge fund firms catch up.

    Members of this rarified group include PDT Partners LLC, Renaissance Technologies LLC, D.E. Shaw & Co. and Two Sigma Investments LLC, sources said.

    “Neither the technology nor the math behind artificial intelligence and machine learning is new. What's new is the vast amount of data that's available now,” said Anthony K. Caruso, vice president and head of quantitative and macro strategies, Mesirow Advanced Strategies Inc., Chicago.

    By way of example, researchers at BlackRock Inc. noted that “where the methodology for incorporating analysts' views into the investment process once involved portfolio managers reading a small number of reports from their favored analysts that corresponded with their areas of investment responsibility, today's technology uses multilingual text mining to search the entire universe of analyst reports for new and potentially market-moving information,” in its report, “Finding Big Alpha in Big Data.”

    Jeffrey Shen, the San Francisco-based managing director, co-CIO of active equity and co-head of BlackRock's scientific active equity strategy, was a co-author of the report and said in an interview that “an explosion of data sources and advances in computational power and speed allows for far deeper analysis for investment managers than was available one or two years ago.”

    Mr. Shen noted, for example, that valuation signals can be collected for every single stock in the world, the analysis of which would be “impossible for any human, no matter how intelligent, to perform. But machines are really good at this.”

    The granularity of the resulting analysis allows hedge fund managers to get both macro and fundamental insights about the data, Mr. Shen said, stressing AI/ML “allows you to be both broad on a macro level and deep on a fundamental level. You used to be able to be only macro or only quant.”

    BlackRock's SAE unit manages $7 billion in hedge funds and liquid hedge fund strategy mutual funds using AI/ML techniques.

    Search for alpha

    Hedge fund managers are expressing more interest in data-driven approaches than any other category of active money manager, said Greenwich Associates' Mr. Connell.

    “It's down to the nature of the beast,” Mr. Connell said, adding “hedge fund managers are keenly interested in the ways they can add alpha to improve their tepid performance.”

    Alpha hunting grounds for hedge fund beasts have expanded to alternative data categories including public website data (social media, applications and search); location tracking; consumer transaction data; and satellite imagery, according to research from capital markets researcher and consultant Tabb Group LLC.

    Mesirow's Mr. Caruso said quantitative hedge fund managers equipped with AI/ML tools use them to troll diverse data sets by:



    • evaluating credit card transactions to see which stocks might benefit from higher consumer spending;

    • tapping satellite imagery of retail parking lots to gauge which stores are getting — or not getting — a lot of foot traffic, or to track the pace of shipbuilding in yards around the world;

    • skimming data from location services in an effort to predict where people are shopping, eating or recreating; and

    • applying filters to Twitter to check whether whatever's trending could result in a spike or decline in the popularity of certain goods and services.

    Hedge fund managers that successfully use tech tools to produce alpha can be difficult for allocators such as institutional investors and hedge funds-of-funds managers like Mesirow Advanced Strategies to invest with, because they don't provide sufficient transparency about their investment process and their underlying holdings.

    “What's really important to us is ample transparency. We like to know what we own,” Mr. Caruso said. He added that “when quantitative hedge fund managers find a really good alpha signal from their data analysis, they tend to charge a lot for it,” in ranges as high as a 2% management fee and 30% performance fee to a 3% and 30% formula.

    Machines as teachers

    Hedge fund seeder and funds-of-funds manager Jeffrey Tarrant, founder, CEO and chief investment officer of Protege Partners LLC, New York, spent the last three years investigating and evaluating the efficacy of AI/ML-based funds. He's now tracking 70 startup hedge fund firms that use AI/ML strategies to create what Mr. Tarrant calls automated investment learning strategies.

    “These are truly new process-driven approaches that combine both fundamental and quantitative insights from data analysis. It's about machines teaching each other and teaching the human,” Mr. Tarrant said.

    These quantitative AI/ML specialist hedge funds generally have not publicized their existence and are “very tiny little firms that use unconventional investment processes and are definitely not ready for prime time with regard to institutional investment,” Mr. Tarrant said.

    Protege Partners manages or advises on $2.8 billion of assets invested in hedge fund seed funds or hedge funds of funds.

    Veteran industry watchers like Mr. Tarrant wonder — as he said — whether “old quant and fundamental discretionary managers are going to survive” or whether the hedge fund industry will suffer from disruptive new strategies. Mr. Tarrant pointed to the way the medallion taxi business has suffered since Uber Technologies Inc. popped up and began to steal business as a potential model for the hedge fund industry.

    The future will favor data-driven hedge funds, said Norman Kilarjian, head of macro and quantitative strategies at hedge fund consultant Aksia LLC, New York.

    “I deeply believe that in 10, 20 or 30 years, we will realize that computers are better than humans at allocating capital. It's just a matter of time,” he said, warning, “if they're smart, today's stock-pickers are going to incorporate more artificial intelligence and big-data analysis into their processes. The lines between the quants and fundamentally oriented managers will be less distinct.”

    Mr. Kilarjian and others warned of the challenges faced by the firms that are playing catch-up, seeking to add AI/ML to their existing strategies.

    “This is one area of the hedge fund industry that has significant barriers to entry when it comes to the financial engineering, infrastructure and technology needed to succeed. This is where the larger, longer-established quant managers do have an edge,” said Kevin Lenaghan, managing director and head of market-neutral strategies for specialist hedge fund consultant Cliffwater LLC, Marina del Rey, Calif.

    Because of the requirements of these strategies, including statistical arbitrage, market-neutral and systematic managed futures approaches, quantitative hedge fund managers were among the first — and likely will remain the largest group — to use machine learning “to reduce the reliance on human influence” in investment management, Mr. Lenaghan said.

    He stressed that as efficient as AI/ML processes are, “investing still requires an element of skill and luck and human intuition and oversight still is necessary for processes such as awareness of the factor exposures of a portfolio. A human hand is needed to maintain dynamic risk management systems.”

    Related Articles
    Bridgewater to marry beta indexes with Pure Alpha in latest strategies
    Firms at the crossroads: Offer alpha or disappear
    Hedge fund firms start 2016 with whimper, end with bang
    Corporations pour assets into funds
    Prospects of fiduciary rule taking root slowly fading
    Machine learning will transform investment management
    BlackRock puts more of its future in tech
    Management firms gain big attention with upgrades
    Evaluating bank-sponsored risk-premium strategies
    State Street CEO sees custody 'arms race'
    AI? It's not sci-fi anymore
    AI key for third wave of hedge fund managers
    Low-cost demands spurring managed futures evolution
    Technology disruption now a pressing issue for investors
    Commentary: Toward simplicity in asset valuation models
    Traders have long way to go in use of AI, panelists say
    Machine learning, AI pose host of potential risks, benefits in financial servic…
    Managers expecting big things from big data
    Japan's GPIF selects Sony Computer Science Laboratories to study AI applications
    Recommended for You
    Private equity’s health-care role draws spotlight
    Private equity’s health-care role draws spotlight
    Sector’s risks need to be weighed, consultant says
    Sector’s risks need to be weighed, consultant says
    Some alternative strategies struggle in first quarter following tough 2020
    Some alternative strategies struggle in first quarter following tough 2020
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center