Saturday, 1 October 2016
Last updated 12 hours ago
Feb 27 2015 | 5:42am ET
By Kelly Bit (Bloomberg) -- The world’s largest hedge fund manager is banking on machines.
Ray Dalio’s $165 billion Bridgewater Associates will start a new, artificial-intelligence unit next month with about half a dozen people, according to a person with knowledge of the matter. The team will report to David Ferrucci, who joined Bridgewater at the end of 2012 after leading the International Business Machines Corp. engineers that developed Watson, the computer that beat human players on the television quiz show “Jeopardy!”
The unit will create trading algorithms that make predictions based on historical data and statistical probabilities, said the person, who asked not to be identified because the information is private. The programs will learn as markets change and adapt to new information, as opposed to those that follow static instructions. A spokeswoman for Westport, Connecticut-based Bridgewater declined to comment on the team.
Quantitative investment firms including $24 billion Two Sigma Investments and $25 billion Renaissance Technologies are increasingly hiring programmers and engineers to expand their artificial-intelligence staffs. Machine learning gives hedge funds a competitive advantage in markets where trading has been handicapped by rich asset prices, according to Gustavo Dolfino, chief executive officer of recruitment firm WhiteRock Group.
“Machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it,” Dolfino said.
Some data scientists have been leaving firms outside of finance for larger paychecks at hedge funds, according to Dolfino. Quantitative firms have been on a winning streak and last year produced some of the highest returns in the $2.8 trillion hedge fund industry, by capturing price discrepancies across markets, making money from a plunge in oil prices and by purchasing government bonds that human traders dismissed.
This year, Bridgewater’s performance has beaten most of its peers that invest across global markets based on economic themes. The firm’s Pure Alpha II fund rose 8.3 percent in January, compared with the 1.1 percent average return that macro funds posted, according to data compiled by Bloomberg, during a period when government debt rallied and oil slumped. The fund has gained an annualized 13 percent since inception in 1991.
Renaissance and Two Sigma, unlike Bridgewater, have histories of constructing algorithms that learn, given their executives’ backgrounds.
Bob Mercer and Peter Brown developed language-recognition programs at IBM before they became co-CEOs of East Setauket, New York-based Renaissance, which Jim Simons started in 1982. Before co-founding New York-based Two Sigma in 2001 with John Overdeck, David Siegel earned a PhD in computer science from Massachusetts Institute of Technology, where he studied at its artificial- intelligence laboratory.
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