Hitting Home Runs with AI Investing?

Nope, back to practice.

July 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• The survival rate of AI-focused ETFs is low
• The track record of AI ETFs is mediocre
• AI hedge funds struggle to outperform general hedge funds

INTRODUCTION

35% of Y Combinator’s cohort of startups in the first half of 2023 was focused on artificial intelligence (AI), which mirrors the enthusiasm of public market investors that have pushed up the stock prices of anything that involves AI. The market capitalization of NVIDIA, whose computer chips are needed for applying AI, has breached $1 trillion and its P/E multiple is north of 200x.

Using artificial intelligence for investing is an obvious application and many small and large asset management companies boast the claim to do so. We have reviewed the performance of funds using AI in their investment process in 2019, which has been largely disappointing (read AI, What Have You Done for Me Lately?).

However, this was almost four years ago, which can be considered a lifetime in the rapid evolution of technology. Computing power has become cheaper, computer scientists are more skilled and knowledgeable, and software like ChatGPT has emerged.

In this article, we will review the state of AI investing.

AI-FOCUSED ETFS

Chen & Ren published a paper on AI-focused mutual funds and ETFs in 2021, which included a list of 15 ETFs using AI in their investment processes. From those 15 ETFs that were trading in the US stock market, only 4 are still trading today while the rest has been liquidated. Although the ETF industry is known for launching and liquidating rapidly, this is not a good indication of the commercial success of AI-focused investment products (read An Anatomy of Thematic Investing).