Blog Post from April 09, 2023 by James Bates
AI Investing And Did It Find Alpha?

AI Investing and Did it Find Alpha?

Artificial Intelligence (AI) is revolutionizing the financial industry, particularly when it comes to investing strategies. We have seen hedge funds that use algorithmic trading deliver returns that far outpace peers starting as far back as 20 years ago. This gap between traditional and AI tech enabled funds has accelerated in recent years. AI-based investing strategies have been designed to improve investment performance by leveraging advanced computational techniques to analyze historical data, market trends, and economic indicators. These strategies help investors to identify opportunities, reduce risks, and optimize portfolio performance.

What is AI-Based Investing?

AI-based investing involves using algorithms and machine learning techniques to analyze vast amounts of data to identify trends and patterns in financial markets. AI algorithms can identify profitable investment opportunities and generate insights that traditional investment managers may miss. For example, AI algorithms can analyze financial statements, news articles, social media sentiment, and other sources of data to make investment decisions.

AI-Based Investing Strategies

There are various terms used for AI-based investing strategies. Although the underlining technology may be similar, there are different nuances that the terms exemplify below.

Deep Learning: This strategy involves using neural networks to analyze large amounts of data, including historical market data and economic indicators. The algorithm can identify trends, patterns, and relationships that may be difficult for humans to identify.

Natural Language Processing: This strategy involves analyzing news articles, social media posts, and other sources of information to understand market sentiment and investor sentiment. This information can help investors make more informed decisions about their investments.

Predictive Analytics: This strategy involves using machine learning techniques to predict market trends and identify profitable investment opportunities. The algorithm can analyze historical data and identify patterns that may indicate future market movements.

Quantitative Analysis: This strategy involves using mathematical models to identify profitable investment opportunities. The algorithm can analyze financial data and identify patterns that may indicate future market movements.

Benefits of AI-Based Investing Strategies

AI-based investing strategies offer several benefits for investors, including the following:

Improved Accuracy: AI algorithms can analyze vast amounts of data quickly and accurately, helping investors to make more informed and accurate investment decisions.

Reduced Risk: AI algorithms can help investors to identify potential risks and mitigate them before they become significant issues.

Increased Efficiency: AI algorithms can analyze large amounts of data in a fraction of the time it would take for a human analyst, helping investment managers to optimize their portfolio performance.

Improved Performance: AI-based investing strategies can help investors to identify profitable investment opportunities and optimize portfolio performance, leading to increased returns.


AI is being used to automate trading. Automated trading involves using algorithms to execute trades based on pre-defined rules and pattern matches over very large signal sets. This can help funds react quickly to market changes and execute trades more efficiently. Automated trading algorithms analyze market data and execute trades in a matter of milliseconds, much faster than a human trader could.

Model Bias and Overfitting

Despite the potential benefits of AI investing, there are also some challenges to consider. One concern is that AI algorithms may be susceptible to bias. As patterns or classifiers are found in the data, the predictions may change over time or other data points become important for predictions to have value. As models are being creating and used, human algorithm managers become important to provide oversight and avoid algorithmic trading patterns that may appear on the surface to fit a pattern, but do not yield desired results.

Human Involvement

We see more collaboration between human analysts and AI algorithms, with humans providing context and judgement while AI provides analytical power. Ultimately, the key to successful AI investing is to strike a balance between the power of AI and the human expertise that can interpret its findings. uses some of these AI based strategies as we strive to find the inefficiencies (or profit opportunities) in the market that have alluded human and algorithmic traders. As automated trading algorithms continue to become more complex, funds that are not using these methods will become less and less relevant.


AI-based investing strategies are changing the way that investment managers approach financial markets. These strategies offer numerous benefits, including improved accuracy, reduced risk, increased efficiency, and improved performance. As AI technology continues to improve, we can expect to see more sophisticated algorithms that can analyze increasingly complex data sets.

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