Using public information and making small adjustments, an AI fund manager has outperformed 93% of mutual fund managers by an average of 600%. This finding was reported by researchers from Stanford Graduate School of Business and Boston College. The team, including Ed deHaan, Suzie Noh, Chanseok Lee, and Miao Liu, developed an “AI analyst” to study how AI could enhance the performance of mutual fund managers.
Ed deHaan noted that they spent a year verifying their data and model. “We had this result a year ago,” he said. “And we spent the past 12 months scouring every inch of the data and of the model trying to find where we’d done something wrong.”
The AI analyst managed to generate $17.1 million per quarter on top of actual returns over a 30-year period from 1990 to 2020. DeHaan stated, “AI beat 93% of managers over a 30-year period by an average of 600%.”
The AI was trained using market data from 1980 to 1990 and correlated various variables with future stock performance. These included both straightforward variables like Treasury rates and more complex ones such as sentiment analyses. The AI used this information to create a predictive investment model.
The AI adjusted portfolios quarterly while maintaining basic features like risk levels. It sorted investments into categories based on expected performance and made swaps where beneficial. If certain holdings were underperforming, it would invest in index funds instead.
Suzie Noh mentioned that if more investors adopt similar tools, the advantage may diminish: “If every investor were using this tool, then much of the advantage would go away.”
Despite its success with simple variables like firm size and trading volume, deHaan highlighted the costliness of extracting extra earnings from public information due to processing frictions: “It turns out this information is expensive to know, even when datasets themselves are freely available.”
The study raises questions about AI’s role in investing. While automation might handle data collection tasks, deHaan believes human input remains valuable for strategy development: “While this is speculation, I would think there will always be a role for clever humans who can guide the process and think in broad ways about strategies that haven’t yet been thought of.”
This research underscores potential shifts in investment management as technology continues to evolve.
