While Star Wars and hedge funds are rarely mentioned in the same sentence, artificial intelligence (AI), algorithms and robot investors have experienced no small amount of play in the financial media. In the broader media, headlines tout the proximity of automated warfare driven by artificial intelligence installed in drones and robotic soldiers, imbuing them with the ability to make life and death decisions on the battlefield. Indeed, automation has been on the march since the dawn of the industrial revolution, continuing unabated into the digital age, spreading its reach exponentially into areas of human endeavor once believed unconquerable by technology.
What’s in Store for Hedge Funds?
The hedge fund industry is not immune. The industry is currently experiencing automation in key areas of its operations. Examples include regulatory reporting, customer reports, and computer-driven strategies. Quant funds are currently exploiting complex algorithms, which rely exclusively on mathematical models and high-powered computers to direct trades.
The range and complexity of modern hedge funds is unparalleled. Many of today’s funds would be virtually unrecognizable to pioneers in the industry who had few strategy options that were more multifarious than a long/short strategy.
Tremendous strides have been made in the 21st century, which bring the industry closer to front-office to back-office automation, but the hedge fund industry is, in this regard, in its infancy.
Independent software vendors have developed a variety of applications to process trades, provide quantitative analysis, manage regulatory concerns and raise the level of transparency for investors.
Meanwhile, the industry struggles with dual investor criticism on the issues of performance and fees. As a result, hedge fund managers are turning to technology to reduce costs and enhance performance. Happily, investors are very much on board, which guarantees this trend will continue.
Will Technology Replace Humans?
The short answer is no! However, it is clear that the job descriptions relating to the operation of a hedge fund will change. There is already evidence of this in quant funds, which hire mathematics PhDs and computer scientists in significant numbers. The work product of these mathematicians may ultimately result in job loss for others in the firm. This is not the equivalent of replacing humans with technology, but rather a shift in the types of roles required by firms.
Hedge fund automation is minimal compared to other financial sectors, but as stated earlier, this is going to continue to change rapidly. Programming is an easier task due to the same automation that is occurring in the financial sector and productive programmers will cause an increased rate of change in favor of automation.
So, R2-D2 or C-3PO?
Celebrity investors such as David Tepper and Ken Griffin have nothing to fear for the near future. While there are those who would welcome the demise of any number of hedge fund titans, it simply isn’t in the cards at this point. Technology, such as artificial intelligence, is likely to play a role in making these individuals better at their craft rather than supplanting them. Just as R2-D2 and C-3PO helped make a hero of Luke Skywalker, technology has the potential to help make the Griffins and Teppers in the hedge fund industry better managers.