A cofounder of one of the oldest machine-learning funds said the assumption investors make about machine-learning is that it 'can solve any data-rich problem, which is far from being the case.'
The number of hedge funds that say they use machine-learning or artificial intelligence has increased significantly over the past couple of years, with a survey from mid-2018 reporting that over half of respondents do.
Now, with more than half of hedge funds using some form of machine learning or artificial intelligence in their investment processes, according to a BarclayHedge report, the"pendulum has almost swung the other way," says Michael Kharitonov, co-founder of $4 billion Voleon Capital. Machine-learning and artificial intelligence have made their way into the systems and operations aspect of the business. Citco, which is the fund administrator for more than $1 trillion in hedge fund assets, is using machine-learning to track trades and transactions more efficiently, while Brevan Howard has spun off a company called Aim2 that integrates artificial intelligence into trading. Nomura is reportedly using the Aim2 platform for its fixed-income business.
"In some ways, we are automating quant," Kharitonov said."Many of the things quants have humans doing we create systems to do." "For allocators, it raises a number of difficult questions about how you'll do due diligence on the models that the creators or the humans running the firm have difficulty explaining," he said.
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