Fri, Jun 5, 2020
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

As traditional strategies grow obsolete, two former military officers launch artificial intelligence-based hedge fund

Friday, February 24, 2017
Opalesque Industry Update, for New Managers - As 2016 came to a close, the hedge fund industry had experienced four straight quarters of net investor withdrawals, constituting the longest period of capital outflows since the 2008 financial crisis. By April 2016, 85% of hedge funds were below their high water marks. Warren Buffet has long mocked the hedge fund industry, citing high fees and mediocre returns.

The existing hedge fund business model appears broken. Two former U.S. naval officers think they know why and have devoted themselves to an entrepreneurial venture seeking to revolutionize investment management.

The hedge fund industry is a crowded space and the barriers to entry are high. There are two paths to launching a fund – the first is to work in the investment management industry, applying variations of traditional strategies, until one develops the long track record needed to raise capital; the second is to be staked by wealthy individuals in one's personal network. The former is unlikely to innovate; research shows that insiders tend not to disrupt their industries. The latter requires the perfect storm of brilliance, vision, and connections to money to bring a novel approach or product to fruition.

This being the case, it should be no surprise that most startup hedge funds fail. The barriers described do not just prevent entry – they prevent innovation.

Matt Sandretto, a former aviator in the U.S. Navy and a Wharton MBA, recognized that artificial intelligence now has prediction capabilities that no team of humans can match. The technology excels in a whole host of tasks that depend on classification and prediction; artificial intelligence (AI) has enabled the development of autonomous vehicles, the prediction of which movies you might like, and the creation of computers that can beat humans in complex games. Using an AI architecture known as deep neural networks, he has created an equities prediction engine that classifies expected stock performance relative to the upcoming month's median return. These classifications are then used to build a long-short portfolio of equities.

The strategy substantially outperformed the S&P 500 in a 15-year out-of-sample backtest. Currently trading with partner capital, early results have been in alignment with these extensive research and development efforts. Mr. Sandretto will be joined by his business partner, Jeffrey Payne, in formally launching this strategy in September 2017 as Greyfeather Capital, LP (http://www.greyfeathercapital.com). Mr. Payne is a former U.S. Navy submarine officer with science degrees from the United States Naval Academy and MIT and an MBA from the Wharton School.

Early-stage investment in Greyfeather Capital, LP will be limited to those individuals and institutions that have demonstrated a commitment to innovation.

Greyfeather Capital will also launch a secondary line of business, licensing aspects of its prediction technology to investment management firms for risk management and portfolio construction. The addition of cutting-edge AI prediction technology to existing fundamental strategies can produce very exciting results for investment managers and investors alike. The performance gap between firms committed to harnessing AI and those who are not will likely grow in the years ahead.

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. PE/VC: How Covid-19 could reshape private equity fundraising, The private equity bet that coronavirus cut short[more]

    How Covid-19 could reshape private equity fundraising From Asian Investor: The pandemic looks may have led to greater use of remote capital-raising but might it also encourage investors to establish more overseas offices? The coronavirus outbreak has inevitably hit the amount of mo

  2. Investing: Millennium hedge fund ups bet against Bank of Ireland, Value rotation was the last thing big funds thought would happen, Al Gore's firm sold Amazon and Microsoft stock. Here's what it bought.[more]

    Millennium hedge fund ups bet against Bank of Ireland From Independent: US hedge fund Millennium International Management has raised its bet against Bank of Ireland's shares. It comes as Davy says 2020 will be a write-off for banks, with losses across Irish lenders of €4bn. M

  3. PE/VC: Private equity in the Covid-19 crisis, Carlyle's Africa dealmakers leave to start their own buyout firm, UK asset managers plan shift to off-market strategies including private equity[more]

    Private equity in the Covid-19 crisis From Morning Star: Private equity investment trusts invest in unquoted companies not yet listed on the stock market. How have they fared in the sell-off? Investment trusts have been caught up in the market turmoil of recent months and private equit

  4. New Launches: Apeira Capital seeks $200m for hedge fund-like bets, PIMCO filing reveals ESG fund launch could be ahead, BEA Systems co-founder launches venture fund, Salesforce Ventures launches $125m Europe Trailblazer Fund, The D. E. Shaw group closes first onshore China investment fund, Legg Mason and ClearBridge launch non-transparent ETF, Hong Kong-based asset manager MaiCapital launches actively managed bitcoin hedge fund[more]

    Apeira Capital seeks $200m for hedge fund-like bets From Bloomberg: Natalie Hwang, the former head of Simon Property Group Inc.'s venture capital arm, has launched a new firm and is seeking $200 million for a debut fund. Hwang has been discussing the vehicle with prospective investors, ac

  5. New Launches: Hedge fund Angelo Gordon raising $1.5bn for distressed energy debt, Amundi unveils eight new funds as part of ESG ETF range push, Mezzanine Management gears up for direct lending fund[more]

    Hedge fund Angelo Gordon raising $1.5bn for distressed energy debt From Reuters: Hedge fund Angelo Gordon & Co aims to raise as much as $1.5 billion to buy the debt of distressed oil and gas companies, according to a person familiar with the matter and an investor presentation viewed by R