How to use modern technology to grow your money in the stock market
The modern technology I’m referring to is AI – artificial intelligence. The mention of artificial intelligence in finance prompts different reactions from people, “They’re amazing!” or “They will ruin humanity”. In reality, A.I. today provides phone support, data analysis in direct-lending sites, and assist people in making more intelligent insurance pricing decisions, but it is still a long ways behind from the dark, machine-dominated worlds in the sci-fi movies.
A.I.s are programmed by people to do calculations, problem-solving operations or algorithms, and routine work. They can handle tasks with computational-intensive problems, which is Asset Management, Portfolio Diversification, and others under the big umbrella of Finance.
So, how do we use A.I.’s abilities to make our money grow?
At least 3 hedge funds are now using AI to generate superior returns for their investors: Bridgewater Associates, Renaissance Technologies, and Two Sigma Investments. Renaissance Technologies is said to have “the best physics and mathematics department in the world”, and has one of the best records in investing history having returned +35% annualized over 20 years. “That means that if you put $10,000 in the fund back in 1997, you’d have $4.04 million in your account today,” reports the investor forum Nanalyze.
For now you’ll need to try to get into one of the hedge funds mentioned that are using AI effectively, although keep in mind that past performance is never indicative of future results. These hedge funds are on the lead, but really anyone who knows what they’re doing can use AI for stock trading.
Here are 6 start-ups already using AI for “algorithmic trading strategies”: Sentient, Clone Algo (Singapore-based), Alpaca, Walnut Algorithms (a French startup), Binatix, Aidyia (Hong Kong-based).
Sentient Technologies said it can “simulate 1,800 trading days in just a few minutes and is pitting trillions of virtual traders against each other in a giant game of evolution.” It’s run by an Apple guy who worked on Siri and he’s being secretive and not sharing anything about the returns he’s generating.
“While many might begin their search for companies that provide the automation services, but they may find greater opportunities in firms that supply raw inputs required by AI algorithms, or in the companies that use the core technologies to improve their primary business,” Scott Helfstein, Senior Market Strategist at Morgan Stanley.
Helfstein advises to educate yourself on the technology across the AI ecosystem. He describes 3 types of technology: upstream, core and downstream.
These are companies have access to vast pools of data. They also have expertise organizing the data, and expertise in training the AI machines. They also provide the raw materials, the processing power and cloud data centers used by the AIs.
These are companies developing the actual artificial intelligence applications. They explore new technologies and new AI capabilities on the market, but many of these companies are still experimenting with applications. They invest mostly in extensive processing and cloud computing services that can help their brand deliver AI applications and winning technologies to customers. Google is one of these companies. Google has “Tensorflow” which is a “cognitive computing framework” that is completely built out of software and could be run on any desktop computer. Google also developed their own hardware chip that is optimized for Tensorflow. Other new startups that are looking to build hardware that is optimized for cognitive computing are: KnuEdge, Nervana Systems, Horizon Robotics, krtkl, and Eyeriss.
These are companies that use AI to run their businesses. They are the beneficiaries of AI. These companies typically have high labor costs tied to simple repetitive tasks (example: tile installation, the fast food industry, the farming industry, Amazon’s warehouse robots).
The bottom line is, the AI industry is growing and investors would do well to keep an eye on the key players behind its growth and glean opportunities to invest in these companies. Though again, no investment is without risk.
Source: morganstanley.com, internationalbanker.com, nanalyze.com