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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.