Artificial Intelligence (AI) has been taking over the world by storm, and has played a significant role in the financial markets. Although traditional methods of investing continue to stand the test of time, AI has proven to be quite a resourceful venture in the art. Examples of AI in the stock market include portfolio management, decision making, technical analysis, and analysis of historic trends. Traditionally, humans achieve a 20% success rate, whereas AI applications have reached up to a 60-90% success rate depending on the program, and the amount of human intervention.
From an institutional standpoint, hedge funds extensively use algorithmic trading, and AI to help forecast markets, and play their cards based on that. Some funds use AI based ETFs(exchange traded funds), which are a group of stocks which are traded based on a single exchange. An example of an AI based ETF is AIEQ, which holds approximately $170M of assets under management. AIEQ has consistently beat the S&P 500 (a market index that tracks the 500 largest companies in the US), with a return of 50% compared to a 40% return on the S&P.
Although artificial intelligence does have its upside in the markets, it does carry some negative aspects as well. To begin with, although algorithms can predict the movement of stocks in a short term perspective, it is extremely difficult to do some in the longer time frame as they do not consider the future fundamentals of the stock. Instead, as mentioned before, AI effectively created historical trends and attempts to forecast the future based on that. Another issue is the cost effectiveness of AI programs for the retail investor. Although larger firms may have access to AI functionality, it is much more difficult to gain access to accurate models as an individual.
Despite its shortcomings, artificial intelligence continues to have tons of potential to make an impact in the stock market. Although an argument is made that AI replaces many jobs in the labor market, it is also a very demanding industry that is willing to offer many jobs that can boost our economy. The future is bright for AI.