Hedge funds focused on artificial intelligence and machine learning as tools for investment have long been viewed as the future of the industry by many analysts. However, the figures from February paint a picture that is far less optimistic. A recent report by Bloomberg, citing information by Eurekahedge, reveals that this group of hedge funds saw its worst month on record in February.
The poor performance was tied with the first equity correction in about two years, meaning that cross-asset correlations shifted, overturning the AI strategies which were usually seen as reliable indicators of market movement.
Discretionary Funds Beat AI Quants
The Hedge Fund Research index, tracking all discretionary funds, posted a 2.4% decline for February. While this is not good news for those funds, it is nonetheless better than the news coming from AI and quant funds.
Generally, the AI index fell by 7.3% over the same time period. More traditional quants like commodity trading advisers (CTAs) suffered significant losses during the equity reversal as well.
Question of Quant Funds and Selloffs Remains
For as long as there have been quant funds, there have been detractors of those strategies. These detractors often point to two common concerns.
First, the more efficient and successful a quant fund becomes, the thinking goes, the less likely the hedge fund industry as a whole is to rely on human analysts and traders to conduct work. Why employ humans who are relatively inefficient and error-prone when you can program computers to do a better job for less money?
The other primary concern for quant funds has to do with their role in a selloff. AI systems reacting to news about price shifts can quickly pile onto a selloff trend, detractors of the strategy say, exacerbating extreme fluctuations.
Analysts from JPMorgan Chase & Co. believe that AI funds may have played just that type of role in the correction last month. A recent note from the bank suggests that they "find that AI funds, similar to CTAs, likely played a big role in February's correction by being forced to de-risk given an unprecedented 7.3% loss over the past month."
Quest Partners' Nigol Koulajian believes that AI strategies which have been specifically trained to succeed when the market moves in a particular direction might have been completely thrown off by the shift. Strategies that worked well during a calm bull market suddenly proved disastrous when the shift occurred.
Nonetheless, the Eurekahedge data shows information for about about 15 funds, so there is a portion of the AI fund industry which is not reflected in this report. Besides, AI and machine learning strategies are very broad, and funds use these tools in many various ways. Still, if February is to be believed, these funds may have some learning to do about how to deal with a turbulent market.