Artificial Intelligence’s Impact on Hedge Funds: Separating Hype from Reality
There’s been a lot of buzz about artificial intelligence (AI) and how it could change the game in economies and societies. But when it comes to hedge-fund management, some are starting to wonder if the reality will live up to the hype.
Hedge funds and family offices have been diving into AI with high hopes. In fact, around 86% of hedge-fund managers are giving their staff access to different generative AI tools to enhance their work, says the Alternative Investment Management Association (AIMA). These tools are proving to be pretty versatile, helping with everything from marketing materials to coding projects.
AI also has a big role to play in optimizing portfolio management, according to experts. By helping to choose the best mix of assets and strategies to meet investment goals while managing risk efficiently, AI can make a real impact. Take BlackRock, for example, which uses an AI tool called Aladdin Portfolio Guard to fine-tune hedge-fund portfolios. Aladdin sifts through tons of portfolio combinations to create the perfect mix based on market conditions.
The AI theme really took off in 2023 and 2024, with analysts predicting a huge impact on economies and societies. The surge in the share price of top AI-chip supplier Nvidia in 2023 showed just how interested investors were in this tech.
But now, doubts are starting to creep in. Wall Street investors are getting antsy waiting for big payoffs from the heavy investments in AI hardware, development, and talent by Big Tech. Some once high-flying AI startups are facing layoffs or takeover talks, signaling a possible wave of consolidation.
Goldman Sachs even stepped in, questioning whether the reality of AI will live up to the hype. They pointed out that tech giants are set to pour over $1tn into AI spending in the coming years, with little to show for it so far. The head of global equity research at Goldman, Jim Covello, threw out some tough questions about the trillion-dollar problem AI is supposed to solve.
On top of investor skepticism, the real-world performance of hedge funds using AI isn’t looking great. Take the Eurekahedge AI Hedge Fund Index, for example. From December 2009 to July 2024, it only managed a 9.8% annualized return, compared to 13.7% for the S&P 500.
As AI continues to evolve and impact different sectors, the big question remains: will it really revolutionize the way we do things, or is it all just a lot of hype? Only time will tell.
