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Alternative Market Briefing

Artificial intelligence hedge funds outperform the hedge fund benchmark

Monday, September 02, 2019

Laxman Pai, Opalesque Asia:

Hedge funds that use AI-based computer models to help with trading have been outperforming the hedge fund benchmark for the past year, said Preqin Insights.

Based on three-year cumulative returns, Artificial intelligence (AI) hedge funds have outperformed the Preqin All-Strategies Hedge Fund benchmark by a margin of three percentage points, with AI funds returning +26.96% over the past three years and all hedge funds returning +23.87%.

In isolation, this difference does not seem significant enough to give AI funds an edge in the market, but other risk metrics must be taken into account.

According to the report, parsing the three-year volatility and Sharpe ratio data, AI funds have slightly more favorable risk-adjusted parameters than the Preqin All-Strategies Hedge Fund benchmark.

Over a three-year horizon, AI funds have shown 3.20% volatility and a Sharpe ratio of 1.96, while all hedge funds have posted volatility of 3.87% and a Sharpe ratio of 1.40. The greater a portfolio's Sharpe ratio, the better its risk-adjusted-performance.

The higher Sharpe ratio, coupled with the lower volatility over three years, suggests that funds utilizing AI technology have indeed been the better investment over the past three years.

Meanwhile, as AI/machine learning capabilities evolve and become more sophisticated, more hedge funds are using AI trading methods.

The number of AI hedge funds launched in 2018 was up 77% in 2016. ......................

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