Hedge Funds and AI: Lovers at First Sight

July 26, 2023

Note: This essay is the work of a real and still-alive dinobaby. No smart software involved, just a dumb humanoid.

One promise of AI is that it will eliminate tedious tasks (and the jobs that with them). That promise is beginning to be fulfilled in the investment arena, we learn from the piece, “Hedge Funds Are Deploying ChatGPT to Handle All the Grunt Work,” shared by Yahoo Finance. What could go wrong?

Two youthful hedge fund managers are so pleased with their AI-infused hedge fund tactics, they jumped in a swimming pool which is starting to fill with money. Thanks, MidJourney. You have nailed the happy bankers and their enjoyment of money raining down.

Bloomberg’s Justina Lee and Saijel Kishan write:

“AI on Wall Street is a broad church that includes everything from machine-learning algorithms used to compute credit risks to natural language processing tools that scan the news for trading. Generative AI, the latest buzzword exemplified by OpenAI’s chatbot, can follow instructions and create new text, images or other content after being trained on massive amounts of inputs. The idea is that if the machine reads enough finance, it could plausibly price an option, build a portfolio or parse a corporate news headline.”

Parse the headlines for investment direction. Interesting. We also learn:

“Fed researchers found [ChatGPT] beats existing models such as Google’s BERT in classifying sentences in the central bank’s statements as dovish or hawkish. A paper from the University of Chicago showed ChatGPT can distill bloated corporate disclosures into their essence in a way that explains the subsequent stock reaction. Academics have also suggested it can come up with research ideas, design studies and possibly even decide what to invest in.”

Sounds good in theory, but there is just one small problem (several, really, but let’s focus on just the one): These algorithms make mistakes. Often. (Scroll down in this GitHub list for the ChatGPT examples.) It may be wise to limit one’s investments to firms patient enough to wait for AI to become more reliable.

Cynthia Murrell, July 26, 2023

Written by Stephen E. Arnold · Filed Under AI, Financial, News

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Stephen E. Arnold monitors search, content processing, text mining and related topics from his high-tech nerve center in rural Kentucky. He tries to winnow the goose feathers from the giblets. He works with colleagues worldwide to make this Web log useful to those who want to go "beyond search". Contact him at sa [at] arnoldit.com. His Web site with additional information about search is arnoldit.com.