“You could use machine learning to get the metric earlier, faster and more accurately,” said Wes Chan, director of stock selection research. “If it works, that’s pretty significant.”
An even bigger ambition for some firms is mastery of deep learning, a smarter AI that powers Google’s search and Tesla Inc.’s self-driving cars. Deep learning machines, which loosely mimic activity in the multiple layers of neurons in our brains, require fewer instructions from humans. They make discoveries without being told what to find.
“You will see neural networks become better predictors and better tools for all kinds of trades,” said Juergen Schmidhuber, who helped lay the groundwork for modern AI systems and is a consultant to hedge funds. “Many trades will be executed by self-learning algorithms, with a few high-level guys occasionally injecting human decisions. That’s near-term future.”
Ultimately, the future of AI will depend on its ability to make money. Today’s small group of fully automated AI strategies are off to a middling start. Their performance beats the broader hedge fund industry but not the stock market. Thirteen AI funds gained an average of 10.6 percent annually in six years through 2016, and rose 8.5 percent through October, according to an Eurekahedge index.
The same is true for old-school stock pickers, who will always have a job as long as they produce healthy returns for investors.
AI may have toppled one of Buffett’s pillars. But with Berkshire returning 12.5 percent annually from 2011 through 2016, machines have yet to beat the legendary investor.
This article was provided by Bloomberg News.