Artificial intelligence (AI) has the potential to transform hedge fund operations, from generating marketing content to helping portfolio construction. There are concerns that the benefits of AI have been overhyped, but there is little doubt that hedge fund managers will invest heavily in the technology in the coming years.
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Can artificial intelligence deliver on the hype?
AI has received enormous media attention in recent years, with coverage varying from warnings that AI could prove a threat to optimistic forecasts that AI could bring huge economic and societal benefits.
There is certainly little doubt that AI is of huge interest to the hedge fund industry. Our survey of hedge fund managers for our 2025 annual report on the State of the Hedge fund Industry found that around half of the managers who responded thought that the impact of AI in the following three years would be significant, while a further 17% believed AI would be a game changer.
How significant an impact do you think AI will have on your business in the next 3 years?
A majority (54%) of hedge fund managers expected predictive insights and forecasting to be the main area affected, followed by data processing and analysis (52%), while a quarter thought AI would affect alpha generation. Fraud detection was an area where 45% of managers believed AI would have an impact.
The institutional investors surveyed for the report also believed that AI would impact a wide range of areas. Around 63% believed that data processing and analysis would be affected, while 51% thought that back-office operations would be most affected. A relatively small proportion – 12% - anticipated that it would most affect the generation of alpha.
The impact of AI can already be seen, with around 86% of fund managers now using generative AI tools in their work, according to Empaxis, which provides middle- and back-office operations, accounting and systems-integration solutions. The company points out that information is everything in hedge fund management, and access to quality data helps fund managers make more informed decisions, ‘a must in an industry where many funds fail to beat benchmarks’.1 However, Empaxis warns that AI is only as good as the data fed into it, so quality data is a prerequisite for AI to prove effective.
There are growing concerns that the excitement surrounding AI has gone too far, as we discussed in a recent article. The article pointed out that Goldman Sachs had issued a report in July 2024 arguing that the reality of AI may not match the hype. The asset manager said that ‘tech giants and beyond are set to spend over $1tn on AI capex in coming years, with so far little to show for it’. Goldman’s Jim Covello, head of global equity research, asked ‘What trillion-dollar problem will Al solve?’ and noted that ‘replacing low-wage jobs with tremendously costly technology is basically the polar opposite of the prior technology transitions I’ve witnessed in my thirty years of closely following the tech industry’. Covello also questioned whether models trained on historical data would ever be able to replicate humans’ most valuable capabilities.2
AI certainly has significant potential in some areas. It can automate time-consuming and repetitive tasks, reducing manual labour and errors, and freeing analysts and managers to focus on strategic decisions. It can also continuously monitor portfolio performance and alert managers to significant changes or anomalies.
Whether it can help hedge fund managers generate performance-beating alpha is another question entirely. Our annual report reported the behaviour of the Eurekahedge AI Hedge Fund Index, which ‘is designed to provide a broad measure of the performance of underlying hedge fund managers who utilize artificial intelligence and machine learning theory in their trading processes’.
Between December 2009 and July 2024, the index produced a 9.8% annualised return, versus 13.7% for the S&P 500. Worryingly, the AI index posted better relative performance in the first half of the sample than the second. That would seem to give lie to the argument that AI gets better over time as it learns from its mistakes.
The underperformance may well reflect the significant cost of investing in and deploying AI. Active funds in general are already likely to underperform an index, given the burden of management fees and transaction costs.
Overall, therefore, while AI has huge potential across a range of hedge fund operations, from generating marketing content to swiftly analysing billions of data points and thereby assisting in portfolio construction, there do appear to be growing doubts about whether the costs involved will be justified.
Download our state of the hedge fund industry report
As part of our aim to be at the forefront of the hedge fund industry, IG Prime commissioned a survey into the attitudes of hedge funds and institutional investors to key issues facing the industry in 2024 and 2025. The results help inform our State of the Hedge Fund Industry 2025 report. The first of a forward-looking annual series, this year’s report seeks to explain why the industry may have reached a turning point, with returns and asset growth set to improve – possibly markedly – in the coming years. Click here to download the full report now.
Sources
1 https://www.empaxis.com/blog/hedge fund-trends
2 https://www.goldmansachs.com/images/migrated/insights/pages/gs-research/gen-ai--too-much-spend%2C-too-little-benefit-/TOM_AI%202.0_ForRedaction.pdf
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