A $96 billion fund firm created a AI hedge fund, but freaked out when it couldn't explain how it made money (NVDA, AMD)

artificial intelligence

Artificial intelligence has been around since the 1950s but is exploding in popularity recently, especially in the world of finance.

The idea that an investor can do a bit of programming, and then sit back to watch the profits roll in is an exciting idea, especially when it works. But according to a story by Adam Satariano and Nishant Kumar from Bloomberg, one hedge fund manager was initially scared by how well his AI trading machine worked.

"Were we scared by it? Yes. You wanted to wash your hands every time you looked at it," Luke Ellis, CEO of $96 billion hedge fund Man Group, told Bloomberg.

Ellis told Bloomberg that his firm developed a system that worked well and generated profits, but the firm couldn't really explain why it worked or made the trades it did, which is why they held off from rolling it out broadly. But, after several years a Ph.D. level mathematician at the firm decided to dust it off and give it a small portfolio to play with. Since then, the firm has been made the AI model a regular part of the family at Man Group.

It's worth reading the story behind the firm's trading algorithm from Bloomberg, as it tells the tale of an especially successful implementation of one of the hottest areas of tech right now.

Artificial intelligence is an umbrella term for a computer program that can teach itself. Its power comes from its ability to "learn" the rules of the whatever it's tasked with without them being provided ahead of time. The best AI systems find rules and patterns that humans would miss by crunching huge amounts of data that would prove unwieldy for humans.

To understand this concept a bit better, think of a computer playing a game of chess. Chess is a finite world with a defined set of rules that a human can list for a computer ahead of time. There are a huge number of possible scenarios in a game of chess, but the number is finite and computer-crunchable.

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Artificial intelligence systems are not given the rules ahead of time. Instead of listing the rules of chess, a computer using AI would simply be told to watch a huge number of chess games being played and figure it out. After enough matches, the computer would learn the rules of the game and be able to go head to head with a human player. That's exactly how Elon Musk's AI company beat a human in the incredibly complex game of Dota 2 recently.

In the world of finance, data points like shipping routes, weather and investor sentiment can all affect the markets. A human could never program all the rules that affect the markets because those rules are hard to define and almost infinitely numerous. But, they could feed a computer a huge number of data points and tell the computer to figure it out, which is largely what Ellis and his firm did to program their AI machine. He told Bloomberg that he gets pitched new data sets all the time because of this.

AI systems are coming into vogue now because the technology used to crunch these huge data sets has finally caught up with traders' ambitions. Companies like Nvidia and AMD are developing new computer chips that are fine-tuned to run AI systems, and Nvidia's CUDA software platform is helping researchers run their programs even faster.

AI doesn't mean the end of human traders though. Some over-exuberant trading programs are suspected to have caused a stock market flash crash in 2010, according to the Bloomberg story. Ellis and his team have successfully used artificial intelligence to improve returns in their firm, but it's not run entirely by the robots yet.

Regardless, AI is taking over the world of finance. There will be winners and losers, but it's probably here to stay.