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Hedge fund tests AI potential to beat humans

Hedge fund Sentient Technologies is relying on artificial intelligence to trade stock, marking a potential breakthrough in the race between man and machine in investment. “For me, it’s scarier to be relying on those human-based intuitions and justifications than relying on purely what the data and statistics are telling you,” said co-founder Babak Hodjat.

Hodjat, with 21 patents to his name, is co-founder and top scientist of Sentient Technologies Inc. A startup that has spent nearly a decade training an AI system. The system can scour billions of pieces of data, spot trends, adapt as it learns and make money trading stocks. The team of technology-industry vets is betting that software will give their hedge fund an edge on Wall Street pros.

Sentient’s system is inspired by evolution. According to patents, Sentient has thousands of machines running simultaneously around the world. It is algorithmically creating what are essentially trillions of virtual traders that it calls “genes.” These genes are tested by giving them hypothetical sums of money to trade in simulated situations created from historical data. The genes that are unsuccessful die off, while those that make money are spliced together with others to create the next generation. Thanks to increases in computing power, Sentient can squeeze 1,800 simulated trading days into a few minutes.

An acceptable trading gene takes a few days and then is used in live trading. Employees set goals such as returns to achieve, risk level and time horizon. And then let the machines go to work. The AI system evolves autonomously as it gains more experiences.

Sentient typically owns a wide-ranging batch of U.S. stocks. It is trading hundreds of times per day and holding positions for days or weeks. “We didn’t impose that on the system,” says Jeff Holman, the company’s chief investment officer. “The artificial intelligence seems to agree with what you get from human intelligence that it’s better to spread your bets and have a more diversified portfolio.”

It’s hard to know if the AI system works. The company says the AI system is beating internal benchmarks, but won’t disclose what those are. It shares little about the data used for the AI’s decision-making and isn’t profitable.

Source: Bloomberg (6 Feb 2017)

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