AI-powered stock funds bet bots can pick stocks faster and better than humans

In Providence, Rhode Island, on October 14, Reuters reported that a few select fund managers are placing their trust in AI-powered stock funds, believing that these algorithms can process data faster and make better investment decisions than humans. Currently, under 500 ETFs, managing a combined $30 million of the $17 trillion in assets held by the ETF industry, rely solely on AI-powered bots for all aspects of fund management.

This represents a minuscule fraction of the industry's overall size, but AI is gradually finding its way into most asset managers' investment processes, even if the impact on investors is not immediately visible. A Mercer survey from earlier this year found that 91% of asset managers plan to increase their utilization of AI-based portfolio management tools this year, attempting to determine which tasks can be safely entrusted to AI.

Of the small number of funds that rely entirely on AI to generate returns, those that have been in operation for only a few months have managed to outperform the market. Tal Schwartz, the founder and CEO of Ai Funds, launched the High Conviction US Equity AI-Managed ETF in August, which utilizes a proprietary AI learning algorithm that scrutinizes decades of market data.

Despite attracting less than $20 million in assets, the fund is up 2.7% since its launch, outpacing the 1.1% gain of the S&P 500 index during the same period. Two funds launched by Israeli asset manager FinQ in February have also significantly outperformed the S&P 500, with their dollar-neutral US Large-Cap AI-managed ETF up 25.35% and the unhedged version 23.98% higher since inception.

However, advisers and analysts express caution regarding the short track records and higher fees of these AI-powered funds, suggesting that wider investor interest may be limited. Financial advisers like Jeff Judge, from Chesapeake Financial Planners in Forest Hill, Maryland, state that their clients are uneasy with AI making investment decisions, demanding proof of the approach's effectiveness.

Todd Sohn, an ETF analyst at Strategas, emphasizes that performance will be the primary evidence of success for these AI-driven funds. Other firms have also introduced AI-enhanced ETFs, which utilize AI for quantitative analysis, stock evaluation, or risk monitoring, but the cautious approach remains more prevalent. David Wright, head of quantitative investments at Pictet Asset Management in Geneva, compares AI integration in the investment process to the autopilot function in a plane, acknowledging that while it can handle routine tasks, personal oversight is still necessary.