Silicon Valley Hedge Fund Takes On Wall Street With AI Trader

Babak Hodjat believes humans are too emotional for the stock market. So he's started one of the first hedge funds run completely by artificial intelligence, according to Bloomberg.

"Humans have bias and sensitivities, conscious and unconscious," says Hodjat, a computer scientist who helped lay the groundwork for Apple's Siri. "It's well documented we humans make mistakes. 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.

Hodjat, with 21 patents to his name, is co-founder and top scientist of Sentient Technologies, a startup that has spent nearly a decade, largely in secret, training an AI system that 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 responsible for teaching computers to drive cars, beat the world's best poker players and translate languages will give their hedge fund an edge on Wall Street pros.

Sentient won't disclose its performance or many details about the technology, and the jury is out on the wisdom of handing off trading to a machine. While traditional hedge funds including Bridgewater Associates, Point72 and Renaissance Technologies have poured money into advanced technology, many use artificial intelligence to generate ideas, not to control their entire trading operations.

All the same, Sentient, which currently trades only its own money, is being closely watched by the finance and AI communities. The venture capital firm owned by Hong Kong's richest man, Li Ka-shing, and India's biggest conglomerate, Tata Group, are among backers who have given the company $143 million. Trading is "one of the top 10 places that AI can make a difference," says Nello Cristianini, a professor of artificial intelligence at the University of Bristol who has been advising Sentient. "A trading algorithm can look at the data, make a decision, act and repeat, you can have full autonomy.

AI scientists typically have no interest in working for a hedge fund, says Richard Craib, who started the AI hedge fund Numerai. Their system makes trades by aggregating trading algorithms submitted by anonymous contributors who participate in a weekly tournament where prizes are awarded in Bitcoin. It recently raised $6 million from investors including Howard Morgan, the co-founder of the quant investment management firm Renaissance Technologies. Another company, called Emma, started a hedge fund last year based on an artificial intelligence system that can write news articles.

Sentient's system is inspired by evolution. According to patents, Sentient has thousands of machines running simultaneously around the world, 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. As impressive as Sentient's technology appears, it's hard to know if it 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. The company plans to bring in outside investors later this year.

Little performance data is available about AI-focused hedge funds. One index that tracks 12 pools that utilize AI as part of its core strategies, called Eurekahedge AI Hedge Fund Index, returned 5 percent last year. That's slightly better than the average hedge fund, but trailed the S&P 500.