Why Machine Learning Hasn't Made Investors Smarter

Hedge funds have been in the doldrums and face mounting pressure to justify their fees. Will artificial intelligence come to the rescue? A growing number of hedge funds are putting money behind the idea that a branch of AI called machine learning could provide a way to get back on top. The problems? It’s hard, expensive and prone to failure.

A software program that searches for regularly occurring patterns in more data than even the most sleep-deprived junior analyst could examine, and then tests its hypotheses against even more data. What can satellite shots of mall parking lots tell you when combined with in-store sales data? Does a default premium of A to B and a yield curve slope of C to D have an E percent chance of boosting a stock price by F percent or above? If a company’s chief executive or a central bank official uses specific words, does that have an impact on asset prices? Put me in, coach, the algorithm says, I’ll figure it out.