This article was written by Blair Goldenberg, a Financial Analyst at I Know First, and enrolled in a Masters of Finance at Colorado State University.

AI Hedge Fund

Summary:

“The Book of the Future” Increases Employee Efficiency

I Know First Algorithm and its own “Book of the Future”

“The Book of the Future” Increases Employee Efficiency

Ray Dalio founded the largest hedge fund firm in the world called Bridgewater Associates which was established in June of 1975, the hedge fund manages $160 billion.

Ray Dalio is attempting to essentially upload his philosophy to an operating system. The project has a few names and can be referred to as “The Book of the Future” or “The One Thing.” The project comes from the guidelines that employees follow. Data would be taken and incorporated into the new system’s algorithm which will include peer reviews and employee testing in order to place employees in certain roles, dealing with specific tasks and the system will also guide management in hiring, firing and promotions. David Ferrucci who previously worked as a lead on IBM’s Watson project will be supervising the development of the new project.

The philosophy of the founder surrounds his view of humans and the idea that they are complex machines. Emotions are seen as unnecessary in the functionality of the human machine and will inevitably hinder performance. The AI operating system will guide employees, through a GPS type framework, down to how they should spend their time or if they should make a call at any specific time with the end goal being efficiency of employee work.

Bridgewater already utilizes artificial intelligence in the workplace, in the form of a strategic Hedge Fund system called “Pure Alpha.” Their existing AI system uses economic data, while the new system will use science principles relating to management which would then pick up internal data, such as personality tests, internal ratings from coworkers, and information from a preexisting application the employees use to rate colleagues, to create managerial improvements.

In recent years, the emergence of AI and machine learning has pushed employers in the direction of employing AI technologies. For more information on businesses using machine learning the following articles will be useful:

Machine Learning Finance: How AI & Machine Learning Have Impacted Businesses Around The World

Deep Learning Applications: Variances Within the Tech Industry

I Know First Algorithm and its own “Book of the Future”

The new algorithmic system that Bridgewater is utilizing has a few purposes, to maximize employee efficiency and to organize management all while cutting costs. I Know First’s algorithm does essentially the same thing. For example, I Know First’s AI-based algorithm, which incorporates multi-layered neural networks and genetic algorithms, allows us to model the market without human derived assumptions. By doing so, our algorithm is able to achieve flexibility with regards to the model and evolve with the ever-changing markets. The algorithm continually learns and adapts based off of its previous forecasts, and adapts to new conditions and features quickly.

Additionally, the design of the algorithm further enhances its capabilities to be able to make predictions in circumstances not observed before, as a result of its learning experience and intelligence. This is something one cannot achieve without AI technology. This maximizes efficiency of employees when applied to financial institutions. Financial employees become more efficient when they have help from the I Know First algorithmic system. The algorithm is already in use among institutional investors; the product is used by research and analyst teams in hedge funds, banks and family offices or by financial advisors. Efficiency of employees also leads to decrease in operation costs. Rather than employing multiple people to analyze the market, the algorithm does much of that for the company, so the company will cut down extensively on employee wages while retaining integral financial professionals.

I Know First develops, back-tests and offers systematic trading strategies which are used in partnerships with hedge funds and other asset managing entities. These strategies are rules-based and utilize algorithmic forecasting indicators in order to rank and select the trades as well as time the execution. Here the final product are the trades recommendations for execution, depending on the investment strategy profile chosen. The type of strategies varies, including mean-reversion logic and more trend focused approaches, all generating high positive alpha while keeping beta in the 0.3-0.8 range, yielding overall high risk-adjusted returns. The strategies can be used in partnership with I Know First to launch hedge funds, mutual funds or other investment vehicles.

Secondly, the two-fold business model puts I Know First in a unique position: offering custom and standardized algorithmic forecasts to variety of clients (institutional and retail) and researching and developing systematic trading strategies for fund management purposes on a revenue sharing basis. The business model proved itself and I Know First has earned clients’ trust for over four years now and is partnering with large financial institutions not only in Israel (asset manager) but also Europe (bank), United States (wealth management) and Japan (financial information provider).

The competitive advantages can be summarized as following:

Innovative, independent and objective AI-based approach, separating it from traditional models and tools

Self-learning, adaptability and “general intelligence” characteristics, allowing to adapt to, evolve with and predict ever changing financial markets

Unique predictability indicator, allowing to identify and focus on most predictable assets

Daily updated ranked forecasts for >7,000 assets, incorporating most recent market events

Scalable system, allowing to customize offerings to clients, enter new markets and create business opportunities

Providing solutions not only to large financial institutions, but also empowering retail investors with AI technology applied to financial markets

Algorithmic trading ideas generator and decision support system as Cost-Benefit for clients & banks in context of new regulations that aim to solve conflicts of interests, encourage transparency and to ban commissions payable in respect of investment advice and portfolio management (see e.g. MiFID-2 in the EU)

Furthermore, when applying traditional tools often too much subjectivity from the user is required. I Know First algorithmic forecasting technology offers a unique objective, adaptable and self-learning advisory system that is built without any human derived assumptions and doesn’t include any subjective qualitative features.

Conclusion

Efficiency is the goal for both I Know First’s algorithm and the algorithm in “The Book of the Future.” They also both remove the human error that comes with having employees relying on their own thoughts and beliefs. The algorithms are also a way to increase profitability, the basis of the financial industry.