Simple Question

Nomura’s strategy appears to blend elements of quantitative analysis and AI, said Kiyoshi Izumi, a professor at Tokyo University who has written a book on the technology’s investment applications.

The Simplex fund, like many of its peers, crunches a mind-boggling amount of data to answer a simple question: buy or sell? Nomura’s software focuses on indicators of momentum and trend deviation, making a decision twice a day on whether to purchase or sell futures on the Topix index. It also determines the position’s size, with a cap at 50 percent of fund assets.

If his program works as designed, Nomura says, its predictive power should improve over time. And while it’s hard to draw any conclusions after just a few months of trading, the early results are promising. Nomura’s fund is up 1.9 percent from its inception in April through Aug. 19, and he’s targeting annual returns of 7 percent.

AI-driven hedge funds around the world appear to be doing pretty well, too. A Eurekahedge gauge of 12 such funds has gained almost 7 percent this year, including a 1.8 percent advance during the Brexit-fueled market turmoil in June.

That may explain why some of the biggest names in investing are adopting AI technology as they look for an edge amid disappointing industrywide returns and increased scrutiny of management  fees. Point72 Asset Management, which oversees billionaire Steven Cohen’s wealth, set up a vehicle to fund AI startups in March, while Ray Dalio’s Bridgewater Associates devoted resources to the field last year.

While Nomura’s fund is starting small, his firm is no lightweight. Simplex Asset Management is one of Japan’s fastest-growing money managers, overseeing 560 billion yen for clients. Nomura joined Simplex in 2007, after stints at Accenture Plc and Citigroup Global Markets. He has a master’s degree in physics from Tokyo’s Waseda University and three patents to his name, including an algorithm designed to predict hit songs in pop-obsessed Japan.

Despite the challenges of selling an unfamiliar strategy, Nomura expects his fund’s assets under management to double by the end of the year amid interest from regional banks and insurers.

At least one major investor in Japan is watching the space closely. Japan Post Bank Co.’s $2 trillion investment unit is interested in AI technology and is aware of Simplex’s fund, according to Naohide Une, managing director of the bank’s division overseeing hedge fund investments.

“Somebody like Simplex is well positioned,” said Bartt Kellermann, the founder of Global Capital Acquisition, which organizes “Battle of the Quants” conferences for computer-driven investors in the U.S, Europe and Asia. “As every day goes by, the machine becomes more intelligent. It’s going to be a brave new world.”