If there is one constant in the world of quantitative investing and mechanical trading strategies it is change. In a report on artificial intelligence (AI) entering the hedge fund space and doing so with a bang, Eurekahedge noted the changing alternative investment landscape in a January report. The report noted AI hedge fund firms with machine learning are outperforming “traditional quants,” benchmarked by the CTA/Managed Futures index, and doing so with low correlation. These learning and self-adjusting hedge funds are also beating traditional human-based fund managers.
AI Hedge funds beat other alternatives during the quantitative era (2010 and beyond)
Eurekahedge’s AI/Machine Learning Hedge Fund Index, which tracks the historic performance of 23 hedge funds, has outperformed both traditional quant and more generalized hedge funds since 2010. The AI hedge funds provided investors annual returns of 8.44% over this period. This compares to the Eurekahedge CTA / Managed Futures index, which delivered 2.62% over a similar period, the Eurekahedge trend following index, up just 1.62%, and the Eurekahedge hedge fund index, up 4.27% since 2010. In 2016, the AI hedge funds are up 5.01%, closely matching traditional hedge funds 4.48% performance.
Why and how did these intelligently aware machines outperform their rivals?
The “why” question can be answered by understanding two underperformance issues involving traditional quant strategies.
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