Hedge funds are investing heavily in artificial intelligence (AI), and managers and their clients expect it to have a significant impact across their operations. However, there are some doubts about whether the beneficial effects of AI can live up to soaring expectations.
The growing influence of AI on hedge fund operations
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.
Positive response
That’s certainly the view of the respondents to the survey IG Prime conducted for its 2025 State of the Hedge Fund Industry report. Around half of the managers who responded to our survey thought that the impact of AI in the next three years would be significant, while a further 17% believed AI would be a game changer. Only 7% thought AI would have no or very little impact.
Our respondents also thought AI would have an impact on a wide range of their business activities. AI has significant potential to reduce human input in laborious, time-consuming areas such as data processing and analysis, but a majority of the survey respondents also believed it would help with predictive insight, with AI able to identify trends and anticipate market movements.
In addition, as IG Prime reported in the white paper, AI has the potential to optimise portfolio management. In June 2024, for example, Castle Ridge Asset Management, an AI-driven hedge fund manager, launched a multi-strategy AI hedge fund powered by WALLACE, its proprietary AI platform, capable of handling a quadrillion calculations per second. The firm claims that AI optimises investment strategies across various asset classes, with the target of improved diversification and performance metrics.1
Which areas do you think will be most affected by AI in the coming year ?
It’s a similar story among the institutional investors who responded to our survey. AI is expected to hit a broad range of their activities, including trading, where AI enables advanced techniques that can execute trades at optimal times and prices, maximising returns.
Which areas of investment management do you think will be most affected by AI in the coming year?
Quality the key
Around 86% of fund managers now use 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’.2 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.
Too good to be true?
In the face of all this positivity, there are some doubts about whether the impact of AI – not just on hedge fund management but on the wider economy and society – has been exaggerated. Bloomberg reported in June 2024, for example, that Wall Street investors are growing impatient to see clear payoffs from Big Tech’s heavy spending on AI hardware, development and talent. A series of once-high-flying AI startups have either implemented layoffs or are the subject of takeover speculation that could herald a wave of consolidation.3
In July 2024, Goldman Sachs issued a report arguing that the reality 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.4
Disappointing returns
The real-world performance of hedge funds that use AI is also concerning. Consider the performance of the Eurekahedge AI Hedge Fund Index, which ‘is designed to provide a broad measure of the performance of underlying hedge fund managers who utilise artificial intelligence and machine learning theory in their trading processes’, according to its creator. From December 2009 to July 2024, the index produced a 9.8% annualised return, versus 13.7% for the S&P 500.
That underperformance shouldn’t surprise. Active funds in general are likely to underperform an index, given the burden of management fees and transaction costs. Add in the huge cost of investing in and deploying AI, and managers are at a significant disadvantage to trackers.
Then there are regulatory issues, which we explored in a previous article.
Overall, therefore, while AI certainly 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 are 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.globenewswire.com/news-release/
2 https://www.empaxis.com/blog/hedge-fund-trends.
3 https://www.bloomberg.com/news/articles/2024-08-02/big-tech-fails-to-convince-wall-street-that-ai-is-paying-off
4 https://www.institutionalinvestor.com/article/2di0s1e6m7h197mfh6fb4/portfolio/goldman-sachs-throws-cold-water-on-ai-mania
Date de publication:
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
All trading involves risk to capital.
Contact us
Let us create a solution tailored for your needs. Get in touch with our team by phone or email to discuss your objectives, or request a brochure.
All trading involves risk to your capital.
CFD accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd and share dealing and stocks and shares ISA accounts provided by IG Trading and Investments Ltd. IG is a trading name of IG Markets Ltd (a company registered in England and Wales under number 04008957), IG Index Ltd (a company registered in England and Wales under number 01190902) and IG Trading and Investments Ltd (a company registered in England and Wales under number 11628764). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. IG Markets Ltd (Register number 195355), IG Index Ltd (Register number 114059) and IG Trading and Investments Ltd (Register number 944492) are authorised and regulated by the Financial Conduct Authority.
The information on this site is not directed at residents of the United States, Belgium or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.