“Look Dave, I can see you’re really upset about this. I honestly think you ought to sit down calmly, take a stress pill and think things over.”
From Stanley Kubrick’s 2001: A Space Odyssey.
As if MiFID II wasn’t bad enough, now this “EquBot AI Technology with Watson has the ability to mimic an army of equity research analysts working around the clock, 365 days a year, while removing human error and bias from the process.” That is the claim of Chida Khatua, the ETF’s CEO. Unlike the existing algos used by quant funds, A.I. the ability to learn from its mistakes without further requiring programming.
This week, EquBot LLC, in partnership with ETF Managers Group (ETFMG) launched the world’s first ETF powered by artificial intelligence, the AI Powered Equity ETF (NYSE Arca: AIEQ). According to Business Wire, the new ETF uses “cognitive and big data processing abilities of IBM Watson™ to analyze U.S.-listed investment opportunities”.
For those in the dark as far as “Watson” is concerned, it’s Wiki entry notes “Watson is a question answering (QA) computing system that IBM built to apply advanced natural language processing, information retrieval, knowledge representation, automated reasoning, and machine learning technologies to the field of open domain question answering. Watson was named after IBM's first CEO, industrialist Thomas J. Watson. The computer system was specifically developed to answer questions on the quiz show Jeopardy! and, in 2011, the Watson computer system competed on Jeopardy! against former winners Brad Rutter and Ken Jennings winning the first place prize of $1 million. Watson had access to 200 million pages of structured and unstructured content consuming four terabytes of disk storage…but was not connected to the Internet during the game. For each clue, Watson's three most probable responses were displayed on the television screen. Watson consistently outperformed its human opponents on the game's signaling device, but had trouble in a few categories, notably those having short clues containing only a few words.”
Business Wire explained how EquBot makes investment decisions “EquBot’s approach ranks investment opportunities based on their probability of benefiting from current economic conditions, trends, and world- and company-specific events, and identifies those equities with the greatest potential for appreciation. EquBot and ETFMG expect the fund’s portfolio to typically consist of 30 to 70 of U.S. equities only and volatility comparable to the broader U.S. equity market…the fund’s underlying technology is constantly analyzing information for approximately 6,000 U.S.-listed equities, including company management and market sentiment, and processes more than one million regulatory filings, quarterly results releases, news articles, and social media posts every day.”
According to Chida Khatua, CEO and co-founder of EquBot LLC “Machine learning is one of the most powerful applications of artificial intelligence. As powerful as many algorithms underlying expensive quantitative hedge funds and other vehicles might be, unless they’re also built with AI and machine learning baked right in, mistakes can be propagated and opportunities for outperformance can be missed.”
Neither of the founders is lacking in confidence when discussing the potential for the new ETF. From Business Wire “With the launch of AIEQ, we’re not only bringing our new fund to market,’ said Art Amador, co-founder and COO of EquBot. ‘We believe we’re pioneering a whole new investment category; one that will soon have investors and advisors diversifying their portfolios among passive, active and AI approaches”
He added “Everyday, there is more information, not less. That information explosion has made the jobs of portfolio managers, equity analysts, quantitative investors and even index builders more challenging.”
He's not wrong there.
A.I. might be the future of investing, although there have been funds that were so good (LTCM), they didn’t need to post collateral. This is different, obviously as we’re not just talking about a bunch of really 'brainy' humans.
But how sad will it be if we go from this...
An end up with this...
The regulators are already doing their best to make the investment world less fun.
“Open the pod bays doors, HAL”
Writing about this, we were reminded of another life or death confrontation between humans and technology in Stanley’s Kubrick’s “2001: A Space Odyssey”, which also had an oblique reference to an IBM computer. In the movie, there is an argument as to whether the failure of an antenna is due to human error, as the HAL 9000 insists, or HAL, as Mission Control advises. In the ensuing conflict, HAL initially gains the upper hand, kills Poole and almost kills Bowman. Bowman manages to re-enter the ship and get to HAL’s processor core, regressing HAL to his first programmed memory.
“I know everything hasn’t been quite right with me, but I can assure you now, very confidently, that it’s going to be alright again. I feel much better now.”