Is the impact of AI on hedge funds overhyped?

Hedge funds and family offices have invested heavily in AI to increase portfolio management and operational efficiency. For example, about 86% of hedge fund managers grant their staff access to various generative AI tools to support their work, “representing a widespread adoption of this transformative technology,” according to the Alternative Investment Management Association (AIMA).¹ The organization adds that generative AI tools “demonstrate their versatility within hedge funds to enhance marketing materials, perform general research tasks and support their coding efforts.”

According to a number of analysts, AI also has the potential to optimize portfolio management. That’s because AI helps select the best combination of assets and strategies that match investment objectives while managing risks efficiently, says Arootah, which describes itself as an alternative investment advisory service. It cites the example of BlackRock, which is deploying an AI technology known as Aladdin Portfolio Guard to optimize hedge fund portfolios and use it to evaluate correlations, risks and returns of current investments. Aladdin analyzes billions of potential portfolio combinations to put together an ideal composition that matches the market regime.²

AI emerged as a major investment theme in 2023 and 2024, with many analysts predicting that its impact on economies and societies could prove transformative. Leading AI chip supplier Nvidia’s share price tripling by 2023 was emblematic of the surge in investor interest in the theme.

Investors are becoming skeptical

However, doubts are growing over whether AI will truly have a transformative impact – not just on hedge fund management, but on the wider economy and society. For example, Bloomberg reported in June 2024 that Wall Street investors are growing impatient to see clear results from Big Tech’s heavy spending on AI hardware, development and talent. A string of once-high-flying AI startups have implemented layoffs or are the subject of takeover speculation that could herald a wave of consolidation.³

In July, Goldman Sachs released a report saying that reality may not match the hype. The asset manager said that “tech giants and beyond will spend more than $1 trillion on AI investments in the coming years, with little to show for it so far.” 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 hugely expensive technology is essentially the opposite of the previous technology transitions I have seen in my 30 years of closely following the technology industry.” Covello also wondered whether models trained on historical data could ever replicate humans’ most valuable capabilities.⁴

High costs weigh on performance

The real-world performance of hedge funds using 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 use artificial intelligence and machine learning theory in their trading processes,” according to its creator. From December 2009 to July 2024, the index generated an annualized return of 9.8%, compared to 13.7% for the S&P 500.

Figure 1: Hedge fund using AI underperforms the S&P 500 index